Sykes Enterprises, Incorporated
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 |
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For the fiscal year ended December 31, 2005 |
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Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 |
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For The Transition Period From To |
Commission File Number 0-28274
Sykes Enterprises, Incorporated
(Exact name of registrant as specified in its charter)
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Florida
(State or other jurisdiction of
incorporation or organization)
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56-1383460
(IRS Employer
Identification No.) |
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400 N. Ashley Drive, Tampa, Florida
(Address of principal executive offices)
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33602
(Zip Code) |
(813) 274-1000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Voting Common Stock $.01 Par Value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405
of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13
or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Act (Check one):
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Large
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Accelerated filer
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Non-accelerated filer
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes
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No þ
The aggregate market value of the shares of voting common stock held by non-affiliates of the
Registrant computed by reference to the closing sales price of such shares on the NASDAQ National
Market on June 30, 2005, the last business day of the Registrants most recently completed second
fiscal quarter, was $372,470,379.
As of February 24, 2006, there were 39,389,513 outstanding shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE:
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Documents |
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Form 10-K Reference |
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Portions of the Proxy Statement for the year 2006
Annual Meeting of Shareholders |
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Part III Items 1014 |
PART I
Item 1. Business
General
Sykes Enterprises, Incorporated and consolidated subsidiaries (SYKES, our, us or we)
is a global leader in providing outsourced customer contact management solutions and services in
the business process outsourcing (BPO) arena. We provide an array of sophisticated customer
contact management solutions to a wide range of clients including Fortune 1000 companies, medium
sized businesses, and public institutions around the world, primarily in the communications,
technology/consumer, financial services, healthcare, and transportation and leisure industries. We
serve our clients through two geographic operating regions: the Americas (United States, Canada,
Latin America, India and the Asia Pacific Rim) and EMEA (Europe, Middle East and Africa). Our
Americas and EMEA groups primarily provide customer contact outsourcing services (with an emphasis
on inbound technical support and customer service), which includes customer assistance, healthcare and
roadside assistance, technical support and product sales to our clients
customers. These services are delivered through multiple communications channels including phone,
e-mail, Web and chat. We also provide various enterprise support services in the United States that
include services for our clients internal support operations, from technical staffing services to
outsourced corporate help desk services. In Europe, we also provide fulfillment services including
multilingual sales order processing via the Internet and phone, inventory control, product delivery
and product returns handling. Our complete service offering helps our clients acquire, retain and
increase the value of their customer relationships. We have developed an extensive global reach
with state-of-the-art customer contact management centers throughout the United States, Canada,
Europe, Latin America, Asia and Africa. SYKES delivers cost-effective solutions that enhance the
customer service experience, promote stronger brand loyalty, and bring about high levels of
performance and profitability.
SYKES was founded in 1977 in North Carolina and we moved our headquarters to Florida in 1993.
In March 1996, we changed our state of incorporation from North Carolina to Florida. Our
headquarters are located at 400 North Ashley Drive, 28th Floor, Tampa, Florida 33602, and our
telephone number is (813) 274-1000.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and amendments to those reports, as well as our proxy statements and other materials which are
filed with or furnished to the Securities and Exchange Commission (SEC) are made available, free
of charge, on or through our Internet website at www.sykes.com/investors.asp under the heading
Financial Reports SEC Filings, as soon as reasonably practicable after they are filed with, or
furnished to, the SEC.
Industry Overview
According to industry analysts at Datamonitor, the outsourced customer contact management
solutions market was estimated for the U.S., Western Europe and the rest of the world to be
approximately $15 billion, $6 billion and $3 billion in 2005, respectively. Also, the five primary
verticals in which we participate communications, technology/consumer, financial services,
healthcare and transportation and leisure constitute approximately 80% of the total worldwide
market. We believe that growth for outsourced customer contact management solutions and services
will be fueled by the trend of global Fortune 1000 companies and medium sized businesses turning to
outsourcers to provide high quality, cost-effective, value added customer contact management
solutions. Increasingly they are moving toward integrated solutions that consist of a combination
of support from core markets in the United States, Canada and Europe and offshore markets in the
Asia Pacific Rim and Latin America.
In todays ever-changing marketplace, companies require innovative customer contact management
solutions that allow them to enhance the end users experience with their products and services,
strengthen and enhance their company brands, maximize the lifetime value of their customers, turn
cost centers into profit centers, efficiently and effectively deliver human interaction when
customers value it most, and deploy best in-class customer management strategies, processes and
technologies.
Global competition, pricing pressures, softness in the global economy and rapid changes in
technology are making it increasingly difficult for companies to cost effectively maintain the
in-house personnel necessary to handle all their customer contact management needs. As a result,
companies are increasingly turning to outsourcers to perform specialized functions and services in
the customer contact management arena. By working in a
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partnership with outsourcers, companies can ensure that the crucial task of retaining and growing
their customer base is addressed.
Companies outsource customer contact management solutions for various reasons, including the
need to focus on core competencies, to drive service excellence and execution, to achieve cost
savings, to scale and grow geographies and niche markets and to efficiently allocate capital within
their organizations.
To address these needs, SYKES offers full, global customer contact management solutions that
focus on proactively identifying and solving our clients business challenges. We provide
consistent high-value support for our clients customers across the globe in a multitude of
languages, leveraging our dynamic, secure communications infrastructure and our global footprint
that reaches across 17 countries. This global footprint includes established operations in both
onshore and offshore geographic markets where companies have access to high quality customer
contact management solutions at lower costs compared to other markets.
Business Strategy
Our goal is to provide enhanced customer contact management solutions and
services in a proactive and responsive manner, acting as a partner in our clients business. We
anticipate trends and deliver new ways of growing clients customer satisfaction and retention
rates, thus profit, through timely, insightful and proven solutions.
Our business strategy encompasses building long-term client relationships, capitalizing on our
expert worldwide response team, leveraging our depth of relevant experience and expanding both
organically and through acquisitions. The principles of this strategy include the following:
Build Long-term Client Relationships Through Service Excellence. We believe that providing
high-value, high-quality service is critical in our clients decisions to outsource and in building
long-term relationships with our clients. To ensure service excellence and consistency across each
of our centers globally, we implemented an internally developed quality program titled SYKES
Standard of Excellence (SSE). This quality certification standard is a compilation of more than
25 years of experience and best practices from industry standards such as the Malcolm Baldrige
National Quality Award and COPC (Customer Operations Performance Center Inc.) along with our
standard operating procedures. Every customer contact management center strives to meet or exceed
the criteria set forth by SSE, which address leadership, hiring and training, performance
management down to the agent level, forecasting and scheduling, and the client relationship
including continuous improvement, disaster recovery plans and feedback.
Capitalize on an Expert Worldwide Response Team. Companies are demanding a customer contact
management solution that is global in nature one of our key strengths. In addition to our network
of customer contact management centers throughout North America and Europe, we continue to develop
our global delivery model with operations in the Philippines, The Peoples Republic of China, Costa
Rica and El Salvador, offering our clients a secure, high quality solution tailored to the needs of
their diverse and global markets. We continued to expand our global footprint, adding centers in
El Salvador in 2004 and Slovakia in 2005.
Maintain a Competitive Advantage Through Our Depth of Relevant Experience in Technology
Solutions. For more than 25 years, SYKES has been an innovative pioneer in delivering customer
contact management solutions. We seek to maintain a competitive advantage and differentiation by
utilizing technology in new and creative ways to consistently deliver innovative service solutions,
ultimately enhancing the clients relationship with its customers and generating revenue growth.
This includes knowledge solutions for agents and end customers, automatic call distributors,
intelligent call routing and workforce management capabilities based on agent skill and
availability, call tracking software, quality management systems and computer-telephony integration
(CTI). CTI enables our customer contact management centers to serve as transparent extensions for
our clients, receive telephone calls and data directly from our clients systems, and report
detailed information concerning the status and results of our services on a daily basis.
Through strategic technology relationships, we are able to provide fully integrated
communication services encompassing e-mail, chat and Web self-service platforms. In addition, the
European deployment of Global Direct, our customer relationship management (CRM)/ e-commerce
application utilized within the fulfillment operations, establishes a platform whereby our clients
can manage all customer profile and contact information from every communication channel, making it
a viable customer-facing infrastructure solution to support their CRM initiatives.
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We are also continuing to capitalize on sophisticated and specialized technological
capabilities, including our current private ATM network that provides us the ability to manage call
volumes more efficiently by load balancing calls and data between customer contact management
centers over the same network. Our converged voice and data ATM communications network provides a
high-quality, fault tolerant global network for the transport of Voice Over Internet Protocol
communications and fully integrates with emergent Internet Protocol telephony systems as well as
traditional Time Domain Multiplexing telephony systems. Our flexible, secure and scalable network
infrastructure allows us to rapidly respond to changes in client voice and data traffic and quickly
establish support operations for new and existing clients.
Continue to Grow Our Business Organically and through Acquisitions. We have grown our customer
contact management outsourcing operations utilizing a strategy of both internal organic growth and
external acquisitions. This strategy has resulted in an increase from three U.S. customer contact
management centers in 1994 to 37 customer contact management centers worldwide as of the end of
2005. Given the fragmented nature of the customer contact management industry, there may be other
companies that could bring us certain complementary competencies. Acquisition candidates that can,
among other competencies, expand our service offerings, broaden our geographic footprint, allow us
access to new technology and are synergistic in nature, will be given consideration. We have and
will continue to explore these options upon identification of strategic opportunities.
Growth Strategy
Applying the key principles of our business strategy, we execute our growth strategy by
focusing on increasing our share of seats within existing clients, targeting new clients and
establishing a foothold in emerging markets.
Increasing Share of Seats within Existing Clients. We provide customer contact management
support to over 100 multinational companies. With this client list, we have the opportunity to grow
our share of SYKES client base. We strive to achieve this by winning a greater share of our
clients in-house seats as well as gain share from our competitors through continued solid quality
performance and service enhancements such as data mining and analytics and process improvements
all of which are built around and complement our core service offering.
Targeting New Clients. We leverage our operational success by expanding into
complementary business lines of new clients within our targeted verticals: communications,
financial services and healthcare. For instance, we have successfully leveraged our Digital
Subscriber Line (DSL) expertise within the communications vertical to penetrate the cable
broadband space. Building on that
success, we anticipate growing revenue further using similar strategies to penetrate other subsets
of these targeted verticals, like communications, financial services and healthcare.
Establishing a Foothold in Emerging Markets. As part of our growth strategy, we use SYKES
delivery model to service core markets in the United States, Canada and Europe. The U.S., for
instance, is a core market which is partly served by offshore customer contact management centers
across the Asia Pacific Rim and Latin America regions. As countries in these regions experience
rising living standards due to globalization, we are poised to leverage our centers to serve the
emerging markets in these regions.
Services
We specialize in providing inbound outsourced customer contact management solutions in the BPO
arena on a global basis. Our customer contact management services are provided through two
operating segments the Americas and EMEA. The Americas region, representing 64.3% of consolidated
revenues in 2005, includes the United States, Canada, Latin America and the Asia Pacific Rim. The
sites within Latin America and the Asia Pacific Rim are included in the Americas region as they
provide a significant service delivery vehicle for U.S. based companies that are utilizing our
customer contact management solutions in these locations to support their customer care needs. The
EMEA region, representing 35.7% of consolidated revenues in 2005, includes Europe, the Middle East
and Africa. For further information about segments, see Note 20, Segments and Geographic
Information, to the Consolidated Financial Statements. The following is a description of our
customer contact management solutions:
Outsourced Customer Contact Management Services. Our outsourced customer contact management
services represented approximately 94.6% of total 2005 consolidated revenues. Every year, we handle
over 100 million customer contacts including phone, e-mail, Web and chat throughout the Americas
and EMEA regions. We provide these services utilizing our advanced technology infrastructure, human
resource management skills and industry experience. These services include:
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Customer care Customer care contacts primarily include product
information requests, describing product features, activating
customer accounts, resolving complaints, handling billing
inquiries, changing addresses, claims handling,
ordering/reservations, prequalification and warranty management,
providing health information and roadside assistance; |
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Technical support Technical support contacts primarily include
handling inquiries regarding hardware, software, communications
services, communications equipment, Internet access technology and
Internet portal usage; and |
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Acquisition Our acquisition services are primarily focused on
inbound up-selling/cross-selling of our clients products and
services. |
We provide these services, primarily inbound customer calls, through our extensive global
network of customer contact management centers, where our customer contact agents provide support
in a multitude of languages. Our technology infrastructure and managed service solutions allow for
effective distribution of calls to one or more centers. These technology offerings provide our
clients and us with the leading edge tools needed to maximize quality and customer satisfaction
while controlling and minimizing costs.
Fulfillment Services. In Europe, we offer fulfillment services that are fully integrated with
our customer care and technical support services. Our fulfillment solutions include multilingual
sales order processing via the Internet and phone, payment processing, inventory control, product
delivery and product returns handling.
Enterprise Support Services. In the United States, we provide a range of enterprise support
services including technical staffing services and outsourced corporate help desk solutions.
Operations
Customer Contact Management Centers. We operate eighteen stand-alone customer contact
management centers in Europe and South Africa, eight centers in the United States, two centers in
Canada and nine centers offshore, including The Peoples Republic of China, the Philippines, Costa
Rica and El Salvador.
In an effort to stay ahead of industry off-shoring trends, we opened our first customer
contact management centers in the Philippines and Costa Rica over eight years ago. By 2005, we
expanded to five centers in the Philippines, two in Costa Rica, one in The Peoples Republic of
China, and one in El Salvador.
Due to shifts in business demand for offshore customer contact management centers, we closed
several under-utilized customer contact management centers in the United States in 2004 and 2003.
In addition, related to our efforts to reduce costs, we closed two centers in Europe and one center
in the Middle East in 2004 and closed the center in India in 2005.
We utilize a sophisticated workforce management system to provide efficient scheduling of
personnel. Our internally developed digital private communications network complements our
workforce by allowing for effective call volume management and disaster recovery backup. Through
this network and our dynamic intelligent call routing capabilities, we can rapidly respond to
changes in client call volumes and move call volume traffic based on agent availability and skill
throughout our network of centers, improving the responsiveness and productivity of our agents. We
also can offer cost competitive solutions for taking calls to our offshore locations.
Our sophisticated data warehouse captures and downloads customer contact information for
reporting on a daily, real time and historical basis. This data provides our clients with direct
visibility into the services that we are providing for them. The data warehouse supplies
information for our performance management systems such as our agent scorecarding application,
which provides management with the information required for effective management of our operations.
Our customer contact management centers are protected by a fire extinguishing system, backup
generators with significant capacity and 24 hour refueling contracts and short-term battery backups
in the event of a power outage, reduced voltage or a power surge. Rerouting of call volumes to
other customer contact management centers is also available in the event of a telecommunications
failure, natural disaster or other emergency. Security measures are imposed to prevent unauthorized
physical access. Software and related data files are backed up daily and stored off site at
multiple locations. We carry business interruption insurance covering interruptions that might
occur as a result of damage to our business.
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Fulfillment Centers. We currently have three fulfillment centers located in Europe. We provide
our fulfillment services primarily to certain clients operating in Europe who desire this
complementary service in connection with outsourced customer contact management services.
Enterprise Support Services Offices. Our two enterprise support services offices are located
in metropolitan areas in the United States to provide a recruiting platform for high-end knowledge
workers and to establish a local presence to service major accounts.
Quality Assurance
We believe that providing consistent high quality service is critical in our clients
decisions to outsource and in building long-term relationships with our clients. It is also our
belief and commitment that quality is the responsibility of each individual at every level of the
organization. To ensure service excellence and continuity across our organization, we have
developed an integrated Quality Assurance program consisting of three major components:
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The certification of client accounts and customer contact management centers to the SSE program; |
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The application of continuous improvement through application of our Data Analytics and Six Sigma techniques; and |
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The application of process audits to all work procedures. |
The SSE program is a quality certification standard that was developed based on
our more than 25 years of experience, and best practices from industry standards such as the COPC
and Support Center Practices. It specifies the requirements that must be met in each of our
customer contact management centers including measured performance against our standard operating
procedures. It has a well-defined auditing process that ensures compliance with the SSE standards.
Our focus is on quality, predictability and consistency over time, not just point in time
certification.
The application of continuous improvement is established by SSE and is based upon the
five-step Six Sigma cycle, which we have tuned to apply specifically to our service industry. All
managers are responsible for continuous improvement in their operations.
Process audits are used to verify that processes and procedures are consistently executed as
required by established documentation. Process audits are applicable to services being provided for
the client and internal procedures.
Sales and Marketing
Our sales and marketing objective is to leverage our expertise and global presence to develop
long-term relationships with existing and future clients. Our customer contact management solutions
have been developed to help our clients acquire, retain, and increase the value of their customer
relationships. Our plans for increasing our visibility include market focused advertising
consultative personal visits with existing and potential clients, participation in market specific
trade shows and seminars, speaking engagements, articles and white papers, and our website.
Our sales force is composed of business development managers who pursue new business
opportunities and strategic account managers that manage and grow relationships with existing
accounts. We emphasize account development to strengthen relationships with existing clients.
Business development and strategic account managers are assigned to markets in their area of
expertise in order to develop a complete understanding of each clients particular needs, to form
strong client relationships and encourage cross-selling of our other service offerings. We have
inside customer sales representatives who receive customer inquiries and provide outbound lead
generation for the business development managers. We also have relationships with channel partners
including systems integrators, software and hardware vendors and value-added resellers, where we
pair our solutions and services with their product offering or focus. We plan to maintain and
expand these relationships as part of our sales and marketing strategy.
As part of our marketing efforts, we invite existing and potential clients to visit our
customer contact management centers, where we can demonstrate the expertise of our skilled staff in
partnering to deliver new ways of growing clients customer satisfaction and retention rates, thus
profit, through timely, insightful and proven solutions. During
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these visits, we demonstrate our ability to quickly and effectively support a new client or scale
business from an existing client by emphasizing our systematic approach to implementing customer
contact solutions throughout the world.
Clients
In 2005, we provided service to hundreds of clients from our locations in the United States,
Canada, Latin America, Europe, the Philippines, The Peoples Republic of China, India and South
Africa. These clients are Fortune 1000 corporations, medium sized businesses and public
institutions, which span the communications, technology/consumer, financial services, healthcare,
and transportation and leisure industries. Revenue by vertical market for 2005, as a percentage of
our consolidated revenues, was 34% for technology/consumer, 34% for communications, 8% for
financial services, 8% for healthcare, 6% for transportation and leisure, and 10% for all other
vertical markets, including government-related and utilities. We believe our globally recognized
client base presents opportunities for further cross marketing of our services.
For the years ended December 31, 2005, 2004 and 2003 total revenues included $31.4 million, or
6.4% of consolidated revenues, $36.6 million, or 7.8% of consolidated revenues, and $81.2 million,
or 16.9% of consolidated revenues, respectively, from Accenture, a leading systems integrator that
represents a major provider of communication services to whom we provide various outsourced
customer contact management services. Effective May 1, 2003, we entered into a subcontractor
services agreement (the Agreement) with Accenture following the execution of a primary services
agreement between the major provider of communication services and Accenture. Under the terms of
this three-year Agreement, which contains penalty provisions for failure to meet minimum service
levels and is cancelable with 6 months written notice, we provide the products and services
necessary to support and assist Accenture in the management and performance of its primary services
agreement. We expect to renew this Agreement before it expires on April 30, 2006.
In addition, for the years ended December 31, 2005, 2004 and 2003, total revenues included
$27.3 million, or 5.5% of consolidated revenues, $33.8 million, or 7.3% of consolidated revenues,
and $58.5 million, or 12.2% of consolidated revenues, respectively, from Microsoft Corporation, a
major provider of software and related services.
Although no client represented 10% or more of 2005 consolidated revenues, our top ten clients
accounted for approximately 44% of our consolidated revenues in 2005. The loss of (or the failure
to retain a significant amount of business with) Accenture, Microsoft or any of our other key
clients could have a material adverse effect on our performance. Many of our contracts contain
penalty provisions for failure to meet minimum service levels and are cancelable by the client at
any time or on short notice. Also, clients may unilaterally reduce their use of our services under
our contracts without penalty.
Competition
The industry in which we operate is global, therefore highly fragmented and extremely
competitive. While many companies provide customer contact management solutions and services, we
believe no one company is dominant in the industry.
In most cases, our principal competition stems from our existing and potential clients
in-house customer contact management operations. When it is not the in-house operations of a
client, our public and private direct competition includes TeleTech, Sitel, APAC Customer Services,
ICT Group, Client Logic, Convergys, West Corporation, Stream, PeopleSupport, EDS, IBM and NCO Group
as well as the customer care arm of such companies as Accenture, WIPRO, 24/7, Infosys and SR
Teleperformance. There are other numerous and varied providers of such services, including firms
specializing in various CRM consulting, other customer management solutions providers niche or
large market companies, as well as product distribution companies that provide fulfillment
services. Some of these companies possess substantially greater resources, greater name recognition
and a more established customer base than we.
We believe that the most significant competitive factors in the sale of outsourced customer
contact management services include service quality, tailored value added service offerings,
industry experience, advanced technological capabilities, global coverage, reliability,
scalability, security and price. As a result of intense competition, outsourced customer contact
management solutions and services frequently are subject to pricing pressure. Clients also require
outsourcers to be able to provide services in multiple locations. Competition for contracts for
many of our services takes the form of competitive bidding in response to requests for proposals.
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Intellectual Property
We rely upon a combination of contract provisions and trade secret laws to protect the
proprietary technology we use at our customer contact management centers and facilities. We also
rely on a combination of copyright, trademark and trade secret laws to protect our proprietary
software. We attempt to further protect our trade secrets and other proprietary information through
agreements with employees and consultants. We do not hold any patents and do not have any patent
applications pending. There can be no assurance that the steps we have taken to protect our
proprietary technology will be adequate to deter misappropriation of our proprietary rights or
third-party development of similar proprietary software. Sykes ®, REAL PEOPLE. REAL
SOLUTIONS. ® and Sykes Answerteam ® are our registered service marks. We hold
a number of registered trademarks, including ETSC ®, FS PRO ® and FS PRO
MARKETPLACE ®.
Employees
At January 31, 2006, we had approximately 18,900 employees worldwide, consisting
of 17,140 customer contact agents handling technical and customer support inquiries at our centers,
1,540 in management, administration, finance and sales and marketing, 100 in enterprise support
services, and 120 in fulfillment services. Our employees, with the exception of approximately 550
employees in Europe, are not represented by a labor union and we have never suffered an
interruption of business as a result of a labor dispute. We consider our relations with our
employees to be good.
We employ personnel through a continually updated recruiting network. This network includes a
seasoned team of recruiters, a company-wide candidate database, Internet/newspaper advertising,
candidate referral programs and job fairs. However, demand for qualified professionals with the
required language and technical skills may exceed supply, as new skills are needed to keep pace
with the requirements of customer engagements. Competition for such personnel is intense and
employee turnover in this industry is high.
Executive Officers
The following table provides the names and ages of our executive officers, and the positions
and offices currently held by each of them:
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Name |
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Age |
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Principal Position |
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Charles E. Sykes |
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42 |
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President and Chief Executive Officer |
W. Michael Kipphut |
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52 |
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Senior Vice President and Chief Financial Officer |
James C. Hobby |
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55 |
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Senior Vice President, Global Operations |
Jenna R. Nelson |
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42 |
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Senior Vice President, Human Resources |
Daniel L. Hernandez |
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39 |
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Senior Vice President, Global Strategy |
David L. Pearson |
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47 |
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Senior Vice President and Chief Information Officer |
Lawrence R. Zingale |
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50 |
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Senior Vice President, Global Sales and Client Management |
William N. Rocktoff |
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43 |
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Vice President and Corporate Controller |
James T. Holder |
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47 |
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Vice President, General Counsel and Corporate Secretary |
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Charles E. Sykes joined SYKES in 1986 and was named President and Chief Executive Officer in
August 2004. From July 2003 to August 2004, Mr. Sykes was the Chief Operating Officer. From March
2000 to June 2001, Mr. Sykes was Senior Vice President, Marketing and in June 2001 he was appointed
to the position of General Manager, Senior Vice President the Americas. From December 1996 to
March 2000, he served as Vice President, Sales and held the position of Regional Manager of the
Midwest Region for Professional Services from 1992 until 1996. Mr. Charles E. Sykes is the son of
Mr. John H. Sykes.
W. Michael Kipphut, C.P.A., joined SYKES in March 2000 as Vice President and Chief Financial
Officer and was named Senior Vice President and Chief Financial officer in June 2001. From
September 1998 to February 2000, Mr. Kipphut held the position of Vice President and Chief
Financial Officer for USA Floral Products, Inc., a publicly held worldwide perishable products
distributor. From September 1994 until September 1998, Mr. Kipphut held the position of Vice
President and Treasurer for Spalding & Evenflo Companies, Inc., a global manufacturer of consumer
products. Previously, Mr. Kipphut held various financial positions including Vice President and
Treasurer in his 17 years at Tyler Corporation, a publicly held diversified holding company.
James C. Hobby joined SYKES in August 2003 as Senior Vice President, the Americas, overseeing
the daily operations, administration and development of SYKES customer care and enterprise support
operations throughout North America, Latin America, the Asia Pacific Rim and India and was named
Senior Vice President, Global Operations in January 2005. Prior to joining SYKES, Mr. Hobby held
several positions at Gateway, Inc., most recently serving as President of Consumer Customer Care
since August 1999. From January 1999 to August 1999, Mr. Hobby served as Vice President of European
Customer Care for Gateway, Inc. From January 1996 to January 1999, Mr. Hobby served as the Vice
President of European Customer Service Centers at American Express. Prior to January 1996, Mr.
Hobby held various senior management positions in customer care at FedEx Corporation since 1983,
mostly recently serving as Managing Director, European Customer Service Operations.
Jenna R. Nelson joined SYKES in August 1993 and was named Senior Vice President, Human
Resources in July 2001. From January 2001 until July 2001, Ms. Nelson held the position of Vice
President, Human Resources. In August 1998, Ms. Nelson was appointed Vice President, Human
Resources and held the position of Director, Human Resources and Administration from August 1996 to
July 1998. From August 1993 until July 1996, Ms. Nelson served in various management positions
within SYKES, including Director of Administration.
Daniel L. Hernandez joined SYKES in October 2003 as Senior Vice President, Global Strategy
overseeing marketing, public relations, operational strategy and corporate development efforts
worldwide. Prior to joining SYKES, Mr. Hernandez served as President and CEO of SBC Internet
Services, a division of SBC Communications Inc., since March 2000. From February 1998 to March
2000, Mr. Hernandez held the position of Vice President/General Manager, Internet and System
Operations at Ameritech Interactive Media Services. Prior to February 1998, Mr. Hernandez held
various management positions at U S West Communications since joining the telecommunications
provider in 1990.
David L. Pearson joined SYKES in February 1997 as Vice President, Engineering and was named
Vice President, Technology Systems Management in 2000 and Senior Vice President and Chief
Information Officer in August 2004. Prior to SYKES, Mr. Pearson held various engineering and
technical management roles over a fifteen year period, including eight years at Compaq Computer
Corporation and five years at Texas Instruments.
Lawrence R. Zingale joined SYKES in January 2006 as Senior Vice President, Global Sales and
Client Management. Prior to joining SYKES, Mr. Zingale served as Executive Vice President and Chief
Operating Officer of Startek, Inc. since 2002. From December 1999 until November 2001, Mr. Zingale
served as President of the Americas at Stonehenge Telecom, Inc. From May 1997 until November 1999,
Mr. Zingale served as President and COO of International Community Marketing. From February 1980
until May 1997, Mr. Zingale held various senior level positions at AT&T.
William N. Rocktoff, C.P.A., joined SYKES in August 1997 as Corporate Controller and was named
Treasurer and Corporate Controller in December 1999 and Vice President and Corporate Controller in
March 2002. From November 1989 to August 1997, Mr. Rocktoff held various financial positions,
including Corporate Controller at Kimmins Corporation, a publicly held contracting company.
James T. Holder, J.D., C.P.A joined SYKES in December 2000 as General Counsel and was named
Corporate Secretary in January 2001 and Vice President in January 2004. From November 1999 until
November 2000, Mr. Holder served in a consulting capacity as Special Counsel to Checkers Drive-In
Restaurants, Inc., a publicly held
10
restaurant operator and franchisor. From November 1993 until November 1999, Mr. Holder served in
various capacities at Checkers including Corporate Secretary, Chief Financial Officer and Senior
Vice President and General Counsel.
Item 1A. Risk Factors
Factors Influencing Future Results and Accuracy of Forward Looking Statements
This report contains forward-looking statements (within the meaning of the Private Securities
Litigation Reform Act of 1995) that are based on current expectations, estimates, forecasts, and
projections about us, our beliefs, and assumptions made by us. In addition, we may make other
written or oral statements, which constitute forward-looking statements, from time to time. Words
such as may, expects, projects, anticipates, intends, plans, believes, seeks,
estimates, variations of such words, and similar expressions are intended to identify such
forward-looking statements. Similarly, statements that describe our future plans, objectives or
goals also are forward-looking statements. These statements are not guarantees of future
performance and are subject to a number of risks and uncertainties, including those discussed below
and elsewhere in this report. Our actual results may differ materially from what is expressed or
forecasted in such forward-looking statements, and undue reliance should not be placed on such
statements. All forward-looking statements are made as of the date hereof, and we undertake no
obligation to update any forward-looking statements, whether as a result of new information, future
events or otherwise.
Factors that could cause actual results to differ materially from what is expressed or
forecasted in such forward-looking statements include, but are not limited to: the marketplaces
continued receptivity to our terms and elements of services offered under our standardized contract
for future bundled service offerings; our ability to continue the growth of our service revenues
through additional customer contact management centers; our ability to further penetrate into
vertically integrated markets; our ability to expand revenues within the global markets; our
ability to continue to establish a competitive advantage through sophisticated technological
capabilities, and the following risk factors:
Dependence on Key Clients
We derive a substantial portion of our revenues from a few key clients. For the years ended
December 31, 2005, 2004 and 2003, total revenues included $31.4 million, or 6.4% of consolidated
revenues, $36.6 million, or 7.8% of consolidated revenues, and $81.2 million, or 16.9% of
consolidated revenues, respectively, from Accenture, a leading systems integrator that represents a
major provider of communication services to whom we provide various outsourced customer contact
management services. Effective May 1, 2003, we entered into a subcontractor services agreement (the
Agreement) with Accenture following the execution of a primary services agreement between the
major provider of communication services and Accenture. Under the terms of this three-year
Agreement, which contains penalty provisions for failure to meet minimum service levels and is
cancelable with 6 months written notice, we will continue to provide the products and services
necessary to support and assist Accenture in the management and performance of its primary services
agreement. We expect to renew this agreement before it expires on April 30, 2006.
In addition, total revenue for the years ended December 31, 2005, 2004 and 2003, includes
$27.3 million, or 5.5% of consolidated revenues, $33.8 million, or 7.3% of consolidated revenues,
and $58.5 million, or 12.2% of consolidated revenues, respectively, from Microsoft Corporation, a
major provider of software and related services. Our top ten clients accounted for approximately
44%, 45% and 59%, of consolidated revenue for the years ended December 31, 2005, 2004, and 2003,
respectively.
Our loss of, or the failure to retain a significant amount of business with Accenture,
Microsoft or any of our other key clients could have a material adverse effect on our business,
financial condition and results of operations. Many of our contracts contain penalty provisions for
failure to meet minimum service levels and are cancelable by the client at any time or on
short-term notice. Also, clients may unilaterally reduce their use of our services under these
contracts without penalty. Thus, our contracts with our clients do not ensure that we will generate
a minimum level of revenues.
11
Risks Associated With International Operations and Expansion
We intend to continue to pursue growth opportunities in markets outside the United States. At
December 31, 2005, our international operations in EMEA and the Asia Pacific Rim were conducted
from 24 customer contact management centers located in Sweden, the Netherlands, Finland, Germany,
South Africa, Scotland, Ireland, Italy, Hungary, Slovakia, Spain, The Peoples Republic of China and
the Philippines. Revenues from these operations for the years ended December 31, 2005, 2004, and
2003, were 57%, 59%, and 44% of consolidated revenues, respectively. We also conduct business from
five customer contact management centers located in Canada, Costa Rica and El Salvador.
International operations are subject to certain risks common to international activities, such as
changes in foreign governmental regulations, tariffs and taxes, import/export license requirements,
the imposition of trade barriers, difficulties in staffing and managing international operations,
political uncertainties, longer payment cycles, foreign exchange restrictions that could limit the
repatriation of earnings, possible greater difficulties in accounts receivable collection, and
economic instability. Additionally, we have been granted tax holidays in the Philippines, El
Salvador, India and Costa Rica, which expire at varying dates from 2006 through 2013. In some
cases, the tax holidays expire without possibility of renewal. In other cases, we expect to renew
these tax holidays, but there are no assurances from the respective foreign governments that they
will renew them. This could potentially result in adverse tax consequences. Any one or more of
these factors could have an adverse effect on our international operations and, consequently, on
our business, financial condition and results of operations.
As of December 31, 2005, we had cash balances of approximately $86.3 million held in
international operations, which may be subject to additional taxes if repatriated to the United
States.
We conduct business in various foreign currencies and are therefore exposed to market risk
from changes in foreign currency exchange rates and interest rates, which could impact our results
of operations and financial condition. We are also subject to certain exposures arising from the
translation and consolidation of the financial results of our foreign subsidiaries. We have, from
time to time, taken limited actions, such as using foreign currency forward contracts, to attempt
to mitigate our currency exchange exposure. However, there can be no assurance that we will take
any actions to mitigate such exposure in the future, and if taken, that such actions will be
successful or that future changes in currency exchange rates will not have a material impact on our
future operating results. A significant change in the value of the dollar against the currency of
one or more countries where we operate may have a material adverse effect on our results.
Fundamental Shift Toward Global Service Delivery Markets
Clients are increasingly requiring blended delivery models using a combination of onshore and
offshore support. Our offshore delivery locations include The Peoples Republic of China, the
Philippines, Costa Rica and El Salvador, and while we have operated in global delivery markets
since 1996, there can be no assurance that we will be able to successfully conduct and expand such
operations, and a failure to do so could have a material adverse effect on our business, financial
condition, and results of operations. The success of our offshore operations will be subject to
numerous contingencies, some of which are beyond our control, including general and regional
economic conditions, prices for our services, competition, changes in regulation and other risks.
In addition, as with all of our operations outside of the United States, we are subject to various
additional political, economic, and market uncertainties (See Risks Associated with International
Operations and Expansion.). Additionally, a change in the political environment in the United
States or the adoption and enforcement of legislation and regulations curbing the use of offshore
customer contact management solutions and services could effectively have a material adverse effect
on our business, financial condition and results of operations.
Existence of Substantial Competition
The markets for our services on a commoditized basis are highly competitive and subject to
rapid change. While many companies provide outsourced customer contact management services, we
believe no one company is dominant in the industry. There are numerous and varied providers of our
services, including firms specializing in call center operations, temporary staffing and personnel
placement, consulting and integration firms, and niche providers of outsourced customer contact
management services, many of whom compete in only certain markets. Our competitors include both
companies who possess greater resources and name recognition than we do, as well as small niche
providers that have few assets and regionalized (local) name recognition instead of global name
recognition. In addition to our competitors, many companies who might utilize our services or the
services of one of our competitors may utilize in-house personnel to perform such services.
Increased competition, our failure to compete successfully, pricing pressures, loss of market share
and loss of clients could have a material adverse effect
12
on our business, financial condition and results of operations.
Many of our large clients purchase outsourced customer contact management services from
multiple preferred vendors. We have experienced and continue to anticipate significant pricing
pressure from these clients in order to remain a preferred vendor. These companies also require
vendors to be able to provide services in multiple locations. Although we believe we can
effectively meet our clients demands, there can be no assurance that we will be able to compete
effectively with other outsourced customer contact management services companies on price. We
believe that the most significant competitive factors in the sale of our core services include the
standard requirements of service quality, tailored value added service offerings, industry
experience, advanced technological capabilities, global coverage, reliability, scalability,
security and price.
Inability to Attract and Retain Experienced Personnel May Adversely Impact Our Business
Our business is labor intensive and places significant importance on our ability to recruit,
train, and retain qualified technical and consultative professional personnel. We generally
experience high turnover of our personnel and are continuously required to recruit and train
replacement personnel as a result of a changing and expanding work force. Additionally, demand for
qualified technical professionals conversant with the English language and/or certain technologies
may exceed supply, as new and additional skills are required to keep pace with evolving computer
technology. Our ability to locate and train employees is critical to achieving our growth
objective. Our inability to attract and retain qualified personnel or an increase in wages or other
costs of attracting, training, or retaining qualified personnel could have a material adverse
effect on our business, financial condition and results of operations.
Dependence on Senior Management
Our success is largely dependent upon the efforts, direction and guidance of our senior
management. Our growth and success also depend in part on our ability to attract and retain skilled
employees and managers and on the ability of our executive officers and key employees to manage our
operations successfully. We have entered into employment and non-competition agreements with our
executive officers. The loss of any of our senior management or key personnel, or the inability to
attract, retain or replace key management personnel in the future, could have a material adverse
effect on our business, financial condition and results of operations.
Dependence on Trend Toward Outsourcing
Our business and growth depend in large part on the industry trend toward outsourced customer
contact management services. Outsourcing means that an entity contracts with a third party, such as
us, to provide customer contact services rather than perform such services in-house. There can be
no assurance that this trend will continue, as organizations may elect to perform such services
themselves. A significant change in this trend could have a material adverse effect on our
business, financial condition and results of operations. Additionally, there can be no assurance
that our cross-selling efforts will cause clients to purchase additional services from us or adopt
a single-source outsourcing approach.
Our Strategy of Growing Through Selective Acquisitions and Mergers Involves Potential Risks
We evaluate opportunities to expand the scope of our services through acquisitions and
mergers. We may be unable to identify companies that complement our strategies, and even if we
identify a company that complements our strategies, we may be unable to acquire or merge with the
company. In addition, a decrease in the price of our common stock could hinder our growth strategy
by limiting growth through acquisitions funded with SYKES stock.
Our acquisition strategy involves other potential risks. These risks include:
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The inability to obtain the capital required to finance potential acquisitions on satisfactory terms; |
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§ |
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The diversion of our attention to the integration of the businesses to be acquired; |
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§ |
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The risk that the acquired businesses will fail to maintain the quality of services that we have historically provided; |
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§ |
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The need to implement financial and other systems and add management resources; |
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§ |
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The risk that key employees of the acquired business will leave after the acquisition; |
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Potential liabilities of the acquired business; |
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§ |
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Unforeseen difficulties in the acquired operations; |
13
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Adverse short-term effects on our operating results; |
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Lack of success in assimilating or integrating the operations of acquired businesses within our business; |
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The dilutive effect of the issuance of additional equity securities; |
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The impairment of goodwill and other intangible assets involved in any acquisitions; |
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The businesses we acquire not proving profitable; and |
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§ |
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Potentially incurring additional indebtedness. |
Uncertainties Relating to Future Litigation
We cannot predict whether any material suits, claims, or investigations may arise in the
future. Regardless of the outcome of any future actions, claims, or investigations, we may incur
substantial defense costs and such actions may cause a diversion of management time and attention.
Also, it is possible that we may be required to pay substantial damages or settlement costs which
could have a material adverse effect on our financial condition and results of operations.
Rapid Technological Change
Rapid technological advances, frequent new product introductions and enhancements, and changes
in client requirements characterize the market for outsourced customer contact management services.
Our future success will depend in large part on our ability to service new products, platforms and
rapidly changing technology. These factors will require us to provide adequately trained personnel
to address the increasingly sophisticated, complex and evolving needs of our clients. In addition,
our ability to capitalize on our acquisitions will depend on our ability to continually enhance
software and services and adapt such software to new hardware and operating system requirements.
Any failure by us to anticipate or respond rapidly to technological advances, new products and
enhancements, or changes in client requirements could have a material adverse effect on our
business, financial condition and results of operations.
Reliance on Technology and Computer Systems
We have invested significantly in sophisticated and specialized communications and computer
technology and have focused on the application of this technology to meet our clients needs. We
anticipate that it will be necessary to continue to invest in and develop new and enhanced
technology on a timely basis to maintain our competitiveness. Significant capital expenditures may
be required to keep our technology up-to-date. There can be no assurance that any of our
information systems will be adequate to meet our future needs or that we will be able to
incorporate new technology to enhance and develop our existing services. Moreover, investments in
technology, including future investments in upgrades and enhancements to software, may not
necessarily maintain our competitiveness. Our future success will also depend in part on our
ability to anticipate and develop information technology solutions that keep pace with evolving
industry standards and changing client demands.
Risk of Emergency Interruption of Customer Contact Management Center Operations
Our operations are dependent upon our ability to protect our customer contact management
centers and our information databases against damage that may be caused by fire and other
disasters, power failure, telecommunications failures, unauthorized intrusion, computer viruses and
other emergencies. The temporary or permanent loss of such systems could have a material adverse
effect on our business, financial condition and results of operations. Notwithstanding precautions
taken to protect us and our clients from events that could interrupt delivery of services, there
can be no assurance that a fire, natural disaster, human error, equipment malfunction or
inadequacy, or other event would not result in a prolonged interruption in our ability to provide
services to our clients. Such an event could have a material adverse effect on our business,
financial condition and results of operations.
Control By Principal Shareholder and Anti-Takeover Considerations
As of February 24, 2006, John H. Sykes, our founder and former Chairman of the Board and Chief
Executive Officer, beneficially owned approximately 28.3% of our outstanding common stock. As a
result, Mr. Sykes will have substantial influence in the election of our directors and in
determining the outcome of other matters requiring shareholder approval.
14
Our Board of Directors is divided into three classes serving staggered three-year terms. The
staggered Board of Directors and the anti-takeover effects of certain provisions contained in the
Florida Business Corporation Act and in our Articles of Incorporation and Bylaws, including the
ability of the Board of Directors to issue shares of preferred stock and to fix the rights and
preferences of those shares without shareholder approval, may have the effect of delaying,
deferring or preventing an unsolicited change in control. This may adversely affect the market
price of our common stock or the ability of shareholders to participate in a transaction in which
they might otherwise receive a premium for their shares.
Volatility of Stock Price May Result in Loss of Investment
The trading price of our common stock has been and may continue to be subject to wide
fluctuations over short and long periods of time. We believe that market prices of outsourced
customer contact management services stocks in general have experienced volatility, which could
affect the market price of our common stock regardless of our financial results or performance. We
further believe that various factors such as general economic conditions, changes or volatility in
the financial markets, changing market conditions in the outsourced customer contact management
services industry, quarterly variations in our financial results, the announcement of acquisitions,
strategic partnerships, or new product offerings, and changes in financial estimates and
recommendations by securities analysts could cause the market price of our common stock to
fluctuate substantially in the future.
Item 1B. Unresolved Staff Comments
There are no material unresolved written comments that were received from the SEC staff 180
days or more before the year ended December 31, 2005 relating to our periodic or current reports
under the Securities Exchange Act of 1934.
15
Item 2. Properties
Our principal executive offices are located in Tampa, Florida. This facility currently serves
as the headquarters for senior management and the financial, information technology and
administrative departments. We believe our existing facilities are adequate to meet current
requirements, and that suitable additional or substitute space will be available as needed to
accommodate any physical expansion. We operate from time to time in temporary facilities to
accommodate growth before new customer contact management centers are available. During 2005, the
Companys customer contact management centers, taken as a whole, were utilized at average
capacities of approximately 83% and were capable of supporting a higher level of market demand. The
following table sets forth additional information concerning our facilities:
|
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Square |
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Properties |
|
General Usage |
|
Feet |
|
Lease Expiration |
|
AMERICAS LOCATIONS |
|
|
|
|
|
|
|
|
|
|
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Tampa, Florida
|
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Corporate headquarters
|
|
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67,600 |
|
|
June 2010 |
Bismarck, North Dakota
|
|
Customer contact management center
|
|
|
42,000 |
|
|
Company owned |
Wise, Virginia
|
|
Customer contact management center
|
|
|
42,000 |
|
|
Company owned |
Milton-Freewater, Oregon
|
|
Customer contact management center
|
|
|
42,000 |
|
|
Company owned |
Morganfield, Kentucky
|
|
Customer contact management center
|
|
|
42,000 |
|
|
Company owned |
Perry County, Kentucky
|
|
Customer contact management center (1)
|
|
|
42,000 |
|
|
Company owned |
Minot, North Dakota
|
|
Customer contact management center
|
|
|
42,000 |
|
|
Company owned |
Ponca City, Oklahoma
|
|
Customer contact management center
|
|
|
42,000 |
|
|
Company owned |
Sterling, Colorado
|
|
Customer contact management center
|
|
|
34,000 |
|
|
Company owned |
London, Ontario, Canada
|
|
Customer contact management center/Headquarters
|
|
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50,000 |
|
|
Company owned |
LaAurora, Heredia,
|
|
|
|
|
|
|
|
|
Costa Rica (two)
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Customer contact management centers
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|
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131,900 |
|
|
September 2023 |
San Salvador, El Salvador
|
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Customer contact management center
|
|
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41,000 |
|
|
November 2023 |
Toronto, Ontario, Canada
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|
Customer contact management center
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|
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14,600 |
|
|
December 2006 |
North Bay, Ontario, Canada
|
|
Customer contact management center (2)
|
|
|
5,600 |
|
|
September 2006 |
Sudbury, Ontario, Canada
|
|
Customer contact management center (2)
|
|
|
2,000 |
|
|
December 2007 |
Moncton, New Brunswick, Canada
|
|
Customer contact management center (2)
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|
|
12,700 |
|
|
February 2009 |
Barthuste, New Brunswick
|
|
Customer contact management center (2)
|
|
|
1,900 |
|
|
December 2007 |
Makati City, The Philippines
|
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Customer contact management center
|
|
|
101,300 |
|
|
January 2009 |
|
|
|
|
|
136,900 |
|
|
March 2023 |
Mandaue City, The Philippines
|
|
Customer contact management center
|
|
|
67,700 |
|
|
February 2023 |
Pasig City, The Philippines
|
|
Customer contact management center
|
|
|
127,400 |
|
|
December 2023 |
Quezon City, The Philippines
|
|
Customer contact management center
|
|
|
80,100 |
|
|
May 2024 |
Shanghai, The Peoples Republic
of China
|
|
Customer contact management center
|
|
|
103,000 |
|
|
February 2011 |
Bangalore, India
|
|
Technology development services
|
|
|
1,500 |
|
|
January 2007 |
Ada, Oklahoma
|
|
Leased facility (3)
|
|
|
42,000 |
|
|
Company owned |
Palatka, Florida
|
|
Leased facility (3)
|
|
|
42,000 |
|
|
Company owned |
Manhattan, Kansas
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|
Leased facility (3)
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|
|
42,000 |
|
|
Company owned |
Pikeville, Kentucky
|
|
Leased facility (3)
|
|
|
42,000 |
|
|
Company owned |
Cary, North Carolina
|
|
Office
|
|
|
1,200 |
|
|
March 2007 |
Chesterfield, Missouri
|
|
Office
|
|
|
3,600 |
|
|
January 2016 |
Calgary, Alberta, Canada
|
|
Office
|
|
|
4,700 |
|
|
July 2007 |
16
|
|
|
|
|
|
|
|
|
|
|
|
|
Square |
|
|
Properties |
|
General Usage |
|
Feet |
|
Lease Expiration |
|
EMEA LOCATIONS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Amsterdam, The Netherlands
|
|
Customer contact management center
|
|
|
33,000 |
|
|
September 2009 |
Budapest, Hungary
|
|
Customer contact management center
|
|
|
24,000 |
|
|
August 2023 |
Budapest, Hungary
|
|
Customer contact management center
|
|
|
15,700 |
|
|
May 2006 |
Miskolc, Hungary
|
|
Customer contact management center
|
|
|
2,800 |
|
|
December, 2006 |
Edinburgh, Scotland
|
|
Customer contact management center/
|
|
|
35,900 |
|
|
October 2019 |
|
|
Office /Headquarters
|
|
|
17,800 |
|
|
March 2008 |
Turku, Finland
|
|
Customer contact management center
|
|
|
12,500 |
|
|
February 2007 |
Bochum, Germany
|
|
Customer contact management center
|
|
|
43,200 |
|
|
July 2006 |
Pasewalk, Germany
|
|
Customer contact management center
|
|
|
41,900 |
|
|
March 2007 |
Wilhelmshaven, Germany (two)
|
|
Customer contact management centers
|
|
|
76,000 |
|
|
March 2009 |
Johannesburg, South Africa
|
|
Customer contact management center
|
|
|
99,000 |
|
|
March 2025 |
Ed, Sweden
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|
Customer contact management center
|
|
|
44,000 |
|
|
October 2009 |
Sveg, Sweden
|
|
Customer contact management center
|
|
|
35,000 |
|
|
May 2006 |
Prato, Italy
|
|
Customer contact management center
|
|
|
10,000 |
|
|
October 2022 |
Shannon, Ireland
|
|
Customer contact management center
|
|
|
66,000 |
|
|
April 2013 |
Lugo, Spain
|
|
Customer contact management center
|
|
|
27,700 |
|
|
June 2006 |
La Coruña, Spain
|
|
Customer contact management center
|
|
|
32,300 |
|
|
December 2024 |
Kosice, Slovakia
|
|
Customer contact management center
|
|
|
11,400 |
|
|
December 2024 |
Galashiels, Scotland
|
|
Fulfillment center
|
|
|
126,700 |
|
|
Company owned |
Upplands Vasby, Sweden
|
|
Fulfillment center and Sales office
|
|
|
23,500 |
|
|
October 2007 |
Turku, Finland
|
|
Fulfillment center
|
|
|
26,000 |
|
|
March 2007 |
Frankfurt, Germany
|
|
Sales office
|
|
|
1,700 |
|
|
September 2006 |
Madrid, Spain
|
|
Office
|
|
|
800 |
|
|
December 2011 |
|
|
|
(1) |
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Idle facility. |
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(2) |
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Considered part of the Toronto, Ontario, Canada customer contact management center. |
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(3) |
|
Facility is no longer used in our business operations and has been leased to an
unrelated third party. See Note 7 of the Consolidated Financial Statements for
more information on our facilities leased to others. |
17
Item 3. Legal Proceedings
From time to time we are involved in legal actions arising in the ordinary course of business.
With respect to these matters, we believe we have adequate legal defenses and/or provided adequate
accruals for related costs such that the ultimate outcome will not have a material adverse effect
on our future financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders during the fourth quarter of the year
covered by this report.
18
PART II
Item 5. Market for the Registrants Common Equity, Related Shareholder Matters and Issuer Purchases
of Securities
Our common stock is quoted on the NASDAQ National Market under the symbol SYKE. The following
table sets forth, for the periods indicated, certain information as to the high and low sale prices
per share of our common stock as quoted on the NASDAQ National Market.
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
Year ended December 31, 2005: |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
15.41 |
|
|
$ |
11.95 |
|
Third Quarter |
|
|
12.07 |
|
|
|
9.32 |
|
Second Quarter |
|
|
9.60 |
|
|
|
6.57 |
|
First Quarter |
|
|
8.50 |
|
|
|
6.38 |
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004: |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
7.20 |
|
|
$ |
4.51 |
|
Third Quarter |
|
|
7.66 |
|
|
|
4.43 |
|
Second Quarter |
|
|
7.71 |
|
|
|
5.34 |
|
First Quarter |
|
|
10.07 |
|
|
|
5.22 |
|
Holders of our common stock are entitled to receive dividends out of the funds legally
available when and if declared by the Board of Directors. We have not declared or paid any cash
dividends on our common stock in the past and do not anticipate paying any cash dividends in the
foreseeable future.
As of February 24, 2006, there were 1,253 holders of record of the common stock. We estimate
there were approximately 4,215 beneficial owners of our common stock.
Below is a summary of stock repurchases for the quarter ended
December 31, 2005 (in thousands, except average price per share). See Note 16, Earnings Per Share,
to the Consolidated Financial Statements for information regarding our stock repurchase program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Number Of |
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
Shares That May |
|
|
|
|
|
|
Average |
|
as Part of |
|
Yet Be |
|
|
Total Number |
|
Price |
|
Publicly |
|
Purchased |
|
|
of Shares |
|
Paid Per |
|
Announced Plans |
|
Under Plans or |
Period |
|
Purchased (1) |
|
Share |
|
or Programs (1) |
|
Programs |
October 1, 2005 October 31, 2005 |
|
|
|
|
|
|
|
|
|
|
1,644 |
|
|
|
1,356 |
|
November 1, 2005 November 30, 2005 |
|
|
|
|
|
|
|
|
|
|
1,644 |
|
|
|
1,356 |
|
December 1, 2005 December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
1,644 |
|
|
|
1,356 |
|
|
|
|
(1) |
|
All shares purchased as part of a repurchase plan publicly announced on August 5, 2002.
Total number of shares approved for repurchase under the plan was 3 million with no
expiration date. |
19
Item 6. Selected Financial Data
Selected Financial Data
The following selected financial data has been derived from our consolidated financial
statements. The information below should be read in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations, and our Consolidated Financial
Statements and related notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
(In thousands, except per share data) |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
|
2001 |
INCOME STATEMENT DATA (8) : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
494,918 |
|
|
$ |
466,713 |
|
|
$ |
480,359 |
|
|
$ |
452,737 |
|
|
$ |
496,722 |
|
Income (loss) from operations (1,2,3,5,6,7) |
|
|
26,331 |
|
|
|
12,597 |
|
|
|
11,368 |
|
|
|
(11,295 |
) |
|
|
(360 |
) |
Net income (loss) (1,2,3,4,5,6,7) |
|
|
23,408 |
|
|
|
10,814 |
|
|
|
9,305 |
|
|
|
(18,631 |
) |
|
|
409 |
|
Net income (loss) per basic share (1,2,3,4,5,6,7) |
|
|
0.60 |
|
|
|
0.27 |
|
|
|
0.23 |
|
|
|
(0.46 |
) |
|
|
0.01 |
|
Net income (loss) per diluted share (1,2,3,4,5,6,7) |
|
|
0.59 |
|
|
|
0.27 |
|
|
|
0.23 |
|
|
|
(0.46 |
) |
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE SHEET DATA (8) : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
331,185 |
|
|
$ |
312,526 |
|
|
$ |
318,175 |
|
|
$ |
296,841 |
|
|
$ |
309,780 |
|
Shareholders equity |
|
|
226,090 |
|
|
|
210,035 |
|
|
|
200,832 |
|
|
|
182,345 |
|
|
|
191,212 |
|
|
|
|
(1) |
|
The amounts for 2005 include a $1.8 million net gain on the sale of facilities, a $0.3 million
reversal of restructuring and other charges and $0.6 million of charges associated with the
impairment of long-lived assets. |
|
(2) |
|
The amounts for 2004 include a $7.1 million net gain on the sale of facilities, a $5.4 million
net gain on insurance settlement, a $0.1 million reversal of restructuring and other charges and
$0.7 million of charges associated with the impairment of long-lived assets. |
|
(3) |
|
The amounts for 2003 include a $2.1 million net gain on the sale of facilities and a $0.6
million reversal of restructuring and other charges. |
|
(4) |
|
The amounts for 2002 include $20.8 million of restructuring and other charges, $1.5 million of
charges associated with the impairment of long-lived assets and a $1.6 million net gain on the
sale of facilities. |
|
(5) |
|
The amounts for 2002 include $13.8 million of charges associated with the litigation settlement. |
|
(6) |
|
The amounts for 2001 include $14.6 million of restructuring and other charges and $1.5 million
of charges associated with the impairment of long-lived assets. |
|
(7) |
|
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets and
discontinued amortizing goodwill and other intangible assets with indefinite lives. The amounts
for 2001 include $0.4 million of goodwill amortization recorded before adoption of SFAS No. 142. |
|
(8) |
|
The Company has not declared cash dividends per common share for any of the five years presented. |
20
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following should be read in conjunction with the Consolidated Financial Statements and the
notes thereto that appear elsewhere in this document. The following discussion and analysis
compares the year ended December 31, 2005 (2005) to the year ended December 31, 2004 (2004),
and 2004 to the year ended December 31, 2003 (2003).
The following discussion and analysis and other sections of this document contain
forward-looking statements that involve risks and uncertainties. Words such as may, expects,
projects, anticipates, intends, plans, believes, seeks, estimates, variations of such
words, and similar expressions are intended to identify such forward-looking statements. Similarly,
statements that describe our future plans, objectives, or goals also are forward-looking
statements. Future events and actual results could differ materially from the results reflected in
these forward-looking statements, as a result of certain of the factors set forth below and
elsewhere in this analysis and in this Form 10-K for the year ended December 31, 2005 in Item
1.A.-Risk Factors.
Overview
We provide outsourced customer contact management solutions and services with an emphasis on
inbound technical support and customer service, which represented 94.6% of consolidated revenues in
2005, delivered through multiple communication channels encompassing phone, e-mail, Web and chat.
Revenue from technical support and customer service, provided through our customer contact
management centers, is recognized as services are rendered. These services are billed on an amount
per e-mail, a fee per call, a rate per minute or on a time and material basis. Revenue from
fulfillment services is generally billed on a per unit basis.
We also provide a range of enterprise support services for our clients internal support
operations, from technical staffing services to outsourced corporate help desk services. Revenues
usually are billed on a time and material basis, generally by the minute or hour, and revenues
generally are recognized as the services are provided. Revenues from fixed price contracts,
generally with terms of less than one year, are recognized using the percentage-of-completion
method. A significant majority of our revenue is derived from non-fixed price contracts. We have
not experienced material losses due to fixed price contracts and do not anticipate a significant
increase in revenue derived from such contracts in the future.
Direct salaries and related costs include direct personnel compensation, severance, statutory
and other benefits associated with such personnel and other direct costs associated with providing
services to customers. General and administrative expenses include administrative, sales and
marketing, occupancy, depreciation and amortization, and other costs.
Recognition of income associated with grants from local or state governments of land and the
acquisition of property, buildings and equipment is deferred and recognized as a reduction of
depreciation expense included within general and administrative costs over the corresponding useful
lives of the related assets. Amounts received in excess of the cost of the building are allocated
to equipment and, only after the grants are released from escrow, recognized as a reduction of
depreciation expense over the weighted average useful life of the related equipment, which
approximates five years. Deferred property and equipment grants, net of amortization, totaled $18.1
million and $20.6 million at December 31, 2005 and 2004, respectively.
The net (gain) loss on disposal of property and equipment includes the net gain on the sale of
various facilities in 2005 and 2004 offset by the net loss on the disposal of property and
equipment.
The net gain on insurance settlement includes the insurance proceeds received for damage to
our Marianna, Florida customer contact management center in September 2004.
Restructuring and other charges (reversals) consist of reversals of certain accruals related
to the 2002, 2001 and 2000 restructuring plans.
Impairment of long-lived assets charges of $0.6 million in 2005 relate to (1) an asset
impairment charge of $0.1 million in India related to the plan of migration of call volumes of the
customer contact management services and related operations in India to other more
strategically-aligned facilities in the Asia Pacific region and (2) a $0.5 million asset impairment
charge related to the impairment and subsequent sale of property and equipment located in the
United States. Impairment of long-lived assets charges of $0.7 million in 2004 relate to certain
property and
21
equipment in Bangalore, India as a result of the previously mentioned plan of migration.
Interest income primarily relates to interest earned on cash and cash equivalents.
Interest expense primarily includes the commitment fee charged on the unused portion of the
Companys credit facility and interest costs related to potential income tax liabilities.
Income from rental operations, net is generated from the leasing of several U.S. facilities.
Foreign currency transaction gains and losses generally result from exchange rate fluctuations
on intercompany transactions and the revaluation of cash and other current assets that are settled
in a currency other than functional currency.
The Companys effective tax rate for the periods presented reflects the effects of state
income taxes, net of federal tax benefit, tax holidays, valuation allowance changes, foreign rate
differentials, income tax credits, foreign withholding and other taxes, and permanent differences.
22
Results of Operations
The following table sets forth, for the periods indicated, the percentage of revenues
represented by certain items reflected in our Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
2005 |
|
2004 |
|
2003 |
PERCENTAGES OF REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Direct salaries and related costs |
|
|
62.6 |
|
|
|
64.4 |
|
|
|
64.4 |
|
General and administrative |
|
|
32.4 |
|
|
|
35.4 |
|
|
|
33.7 |
|
Net gain on disposal of property and equipment |
|
|
(0.3 |
) |
|
|
(1.5 |
) |
|
|
(0.3 |
) |
Net gain on insurance settlement |
|
|
|
|
|
|
(1.2 |
) |
|
|
|
|
Reversals of restructuring and other charges |
|
|
(0.1 |
) |
|
|
|
|
|
|
(0.1 |
) |
Impairment of long-lived assets |
|
|
0.1 |
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
5.3 |
|
|
|
2.7 |
|
|
|
2.3 |
|
Interest income |
|
|
0.5 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Interest expense |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
(0.2 |
) |
Income from rental operations, net |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
0.3 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
5.9 |
|
|
|
3.4 |
|
|
|
2.9 |
|
Provision for income taxes |
|
|
1.2 |
|
|
|
1.1 |
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
4.7 |
% |
|
|
2.3 |
% |
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth, for the periods indicated, certain data derived from our
Consolidated Statements of Operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Revenues |
|
$ |
494,918 |
|
|
$ |
466,713 |
|
|
$ |
480,359 |
|
Direct salaries and related costs |
|
|
309,604 |
|
|
|
300,600 |
|
|
|
309,489 |
|
General and administrative |
|
|
160,470 |
|
|
|
165,232 |
|
|
|
161,743 |
|
Net gain on disposal of property and
equipment |
|
|
(1,778 |
) |
|
|
(6,915 |
) |
|
|
(1,595 |
) |
Net gain on insurance settlement |
|
|
|
|
|
|
(5,378 |
) |
|
|
|
|
Reversals of restructuring and other charges |
|
|
(314 |
) |
|
|
(113 |
) |
|
|
(646 |
) |
Impairment of long-lived assets |
|
|
605 |
|
|
|
690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
26,331 |
|
|
|
12,597 |
|
|
|
11,368 |
|
Interest income |
|
|
2,559 |
|
|
|
2,445 |
|
|
|
2,102 |
|
Interest expense |
|
|
(667 |
) |
|
|
(773 |
) |
|
|
(836 |
) |
Income from rental operations, net |
|
|
940 |
|
|
|
151 |
|
|
|
|
|
Other income (expense) |
|
|
(60 |
) |
|
|
1,441 |
|
|
|
1,322 |
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes |
|
|
29,103 |
|
|
|
15,861 |
|
|
|
13,956 |
|
Provision for income taxes |
|
|
5,695 |
|
|
|
5,047 |
|
|
|
4,651 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,408 |
|
|
$ |
10,814 |
|
|
$ |
9,305 |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes our revenues, for the periods indicated, by geographic region
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
318,173 |
|
|
$ |
283,253 |
|
|
$ |
321,195 |
|
EMEA |
|
|
176,745 |
|
|
|
183,460 |
|
|
|
159,164 |
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
$ |
494,918 |
|
|
$ |
466,713 |
|
|
$ |
480,359 |
|
|
|
|
|
|
|
|
|
|
|
23
2005 Compared to 2004
Revenues
During 2005, we recognized consolidated revenues of $494.9 million, an increase of $28.2
million or 6.0% from $466.7 million of consolidated revenues for 2004.
On a geographic segmentation, revenues from the Americas region, including the United States,
Canada, Latin America, India and the Asia Pacific Rim, represented 64.3%, or $318.2 million for
2005 compared to 60.7%, or $283.3 million, for 2004. Revenues from the EMEA region, including
Europe, the Middle East and Africa, represented 35.7%, or $176.7 million for 2005 compared to 39.3%
or $183.4 million for 2004.
The increase in Americas revenue of $34.9 million, or 12.3%, for 2005, compared to 2004,
reflects a broad-based growth in client call volumes within our offshore operations and Canada,
including new and existing client programs, a $3.5 million revenue contribution from the KLA
acquisition on March 1, 2005 in Canada and a $1.5 million increase relating to a client contract
pricing re-negotiation. The increase in the Americas revenues was negatively impacted by the
client-driven migration of call volumes from the United States to comparable or higher margin
offshore operations, including Latin America and the Asia Pacific Rim, and the resulting mix-shift
in revenues from the United States to offshore (each offshore seat generates roughly half the
revenue dollar equivalence of a U.S. seat). Revenues from our offshore operations represented 31.7%
of consolidated revenues in 2005 compared to 27.6% in 2004. The trend of generating more of our
revenues from new and existing client programs in offshore operations could continue in 2006. While
operating margins generated offshore are generally comparable or higher than those in the United
States, our ability to maintain these offshore operating margins longer term is difficult to
predict due to potential increased competition for the available workforce and costs of functional
currency fluctuations in offshore markets.
The decrease in EMEAs revenue of $6.7 million, or 3.7%, for 2005 reflects a decrease in call
volumes and certain program expirations, partially offset by the benefit of a strengthened Euro of
approximately $0.1 million compared to 2004. Excluding this foreign currency benefit, EMEAs
revenues would have decreased $6.8 million compared with last year. The persistent economic
sluggishness in our key European markets continues to present a challenging environment
characterized by competitive pricing and offshore alternatives.
Direct Salaries and Related Costs
Direct salaries and related costs increased $9.0 million or 3.0% to $309.6 million for 2005,
from $300.6 million in 2004. As a percentage of revenues, direct salaries and related costs was
62.6% and 64.4% in 2005 and 2004, respectively. This decrease, as a percentage of revenues, was
primarily attributable to lower salary costs due to an overall reduction in U.S. customer call
volumes from the client-driven migration of call volumes offshore and lower labor costs in offshore
operations, as well as lower telephone costs. This decrease was partially offset by higher auto tow
claims costs due to a higher membership base in our roadside assistance programs in Canada. With
the slight strengthening of the Euro in 2005 compared to 2004, there was no significant impact on
direct salaries and related costs.
General and Administrative
General and administrative expenses decreased $4.7 million or 2.9% to $160.5 million for 2005,
from $165.2 million in 2004. As a percentage of revenues, general and administrative expenses
decreased to 32.4% in 2005 from 35.4% in 2004. This decrease was primarily attributable to lower
depreciation and amortization expense, lower compensation costs due to salary costs in the prior
year related to the former chairmans retirement, lower lease costs and equipment maintenance
partially offset by higher legal and professional fees primarily related to settlement of a
contract dispute, higher compliance costs related to the Sarbanes-Oxley Act and higher facility
costs as compared to the same period of 2004. With the slight strengthening of the Euro in 2005
compared to 2004, there was no significant impact on general and administrative expenses.
Net Gain on Disposal of Property and Equipment
The net gain on disposal of property and equipment of $1.8 million for 2005 includes a $1.7
million net gain on the sale of our Greeley, Colorado facility and a $0.1 million net gain on the
sale of a parcel of land in Klamath Falls, Oregon. This compares to a $6.9 million net gain on
disposal of property and equipment in 2004, which includes a
24
$2.8 million net gain on the sale of our Hays, Kansas facility, a $2.7 million net gain on the sale
of our Klamath Falls, Oregon facility, a $0.1 million net gain on the sale of a parcel of land at
our Pikeville, Kentucky facility and a $1.5 million net gain on the sale of our Eveleth, Minnesota
facility, partially offset by a $0.2 million loss on disposal of property and equipment.
Net Gain on Insurance Settlement
In September 2004, the building and contents of our customer contact management center located
in Marianna, Florida was severely damaged by Hurricane Ivan. Upon settlement with the insurer in
December 2004, we recognized a net gain of $5.4 million after write-off of the property and
equipment, which had a net book value of $3.4 million, net of the related deferred grants of $2.2
million. In December 2004, we donated the underlying land to the city with $0.1 million to assist
with the site demolition and clean up of the property with no further obligation of the Company.
Reversal of Restructuring and Other Charges
Restructuring and other charges included a reversal of certain charges totaling $0.3 million
and $0.1 in 2005 and 2004, respectively, related to the remaining lease termination and closure
costs for two European customer contact management centers and one European fulfillment center.
Impairment of Long-Lived Assets
Impairment of long-lived assets charges of $0.6 million in 2005 relate to (1) an asset
impairment charge of $0.1 million in India related to the plan of migration of call volumes of the
customer contact management services and related operations in India to other more
strategically-aligned facilities in the Asia Pacific region and (2) a $0.5 million asset impairment
charge related to the impairment and subsequent sale of property and equipment located in the
United States. Impairment of long-lived assets charges of $0.7 million in 2004 relate to certain
property and equipment in Bangalore, India as a result of the previously mentioned plan of
migration.
Interest Income
Interest income increased to $2.5 million in 2005 from $2.4 million in 2004 reflecting higher
levels of average interest-bearing balances in cash and cash equivalents. The 2004 interest income
included $0.8 million of interest received on a foreign income tax refund.
Interest Expense
Interest expense decreased slightly by $0.1 million to $0.7 million in 2005 as compared to
2004.
Income from Rental Operations, Net
Income from rental operations, net increased to $0.9 million in 2005 from $0.2 million in 2004
as a result of the Companys leasing of four customer contact management facilities during 2005
compared to leasing of one facility during 2004.
Other Income and Expense
Other income, net decreased to zero in 2005 from $1.4 million in 2004. This decrease was
primarily attributable to a $1.3 million decrease in foreign currency translation gains, net of
losses including $0.4 million related to the liquidation of a foreign entity and a $0.1 million
decrease in other miscellaneous income. Other income excludes the effects of cumulative translation
effects included in Accumulated Other Comprehensive Income (Loss) in shareholders equity in the
accompanying Consolidated Balance Sheets.
Provision (Benefit) for Income Taxes
The provision for income taxes of $5.7 million for 2005 was based upon pre-tax
book income of $29.1 million, compared to the provision for income taxes of $5.1
million for the comparable 2004 period based upon pre-tax book income of $15.9
million. The effective tax rate was 19.6% for 2005 and 31.8% for the comparable 2004 period.
This decrease in the effective tax rate resulted from a shift in our mix of earnings and the
effects of permanent
25
differences, valuation allowances, foreign withholding taxes, state income taxes, and foreign
income tax rate differentials (including tax holiday jurisdictions). The effective tax rate of
19.6% for 2005 included the reversal of a $0.6 million beginning of the year valuation allowance.
This reversal resulted from a favorable change in forecasted 2005 and 2006 book income for one EMEA
legal entity, which provided sufficient evidence for current and future sources of taxable income.
Net Income
As a result of the foregoing, we reported income from operations for 2005 of $26.3 million, an
increase of $13.7 million from 2004. This increase was principally attributable to a $28.2 million
increase in revenues, a $4.7 million decrease in general and administrative costs and a $0.2
million increase in reversals of restructuring and other charges partially offset by a $9.0 million
increase in direct salaries and related costs, a $5.1 million decrease in net gain on disposal of
property and equipment, a $5.4 million decrease in net gain on insurance settlement and a $0.1
million increase in asset impairment charges. The $13.7 million increase in income from operations
was partially offset by a net decrease in interest income, interest expense, income from rental
operations, net and other income of $0.5 million and a $0.6 million higher tax provision, resulting
in net income of $23.4 million for 2005, an increase of $12.6 million compared to 2004.
2004 Compared to 2003
Revenues
During 2004, we recognized consolidated revenues of $466.7 million, a decrease of $13.7
million or 2.9% from $480.4 million of consolidated revenues for 2003.
On a geographic segmentation, revenues from the Americas region, including the United States,
Canada, Latin America, India and the Asia Pacific Rim, represented 60.7%, or $ 283.3 million for
2004 compared to 66.9%, or $321.2 million, for 2003. Revenues from the EMEA region, including
Europe, the Middle East and Africa, represented 39.3 %, or $ 183.4 million for 2004 compared to
33.1% or $159.2 million for 2003.
The decrease in Americas revenue of $ 37.9 million, or 11.8%, for 2004, compared to 2003,
reflected the client-driven migration of call volumes from the United States to comparable or
higher margin offshore operations, including Latin America and the Asia Pacific Rim, the resulting
mix-shift in revenues from the United States to offshore (each offshore seat generates roughly half
the revenue dollar equivalence of a U.S. seat) and the ramp down of a technology client late in the
first quarter of 2003. In addition to the revenue mix-shift, the revenue decline reflected an
overall reduction in U.S. customer call volumes primarily attributable to the decision by certain
communications and technology clients to exit dial-up Internet service customer support programs in
early 2004. This decrease was partially offset by an increase in revenues from our offshore
operations, which represented 27.6% of consolidated revenues for 2004 compared to 16.9% for 2003.
We expect this trend of generating more of our revenues from offshore operations to continue in
2005. We anticipate that as our offshore operations grow and become a larger percentage of
revenues, the total revenue and revenue growth rate may decline since each offshore seat generates
less average revenue per seat than in the United States. While the average offshore revenue per
seat is less, the operating margins generated offshore are generally comparable or higher than
those in the United States. However, our ability to maintain these offshore operating margins
longer term is difficult to predict due to potential increased competition for the available
workforce in offshore markets.
The increase in EMEAs revenue of $24.2 million, or 15.3%, for 2004 was primarily related to
the strengthening Euro, which positively impacted revenues for 2004 by approximately $16.5 million
compared to the Euro in 2003. Excluding this foreign currency benefit, EMEAs revenues would have
increased $7.7 million compared with last year reflecting an improvement in certain customer call
volumes and higher incentive payments related to quality operating performance. However, the
persistent economic sluggishness in our key European markets continues to present challenges for
us. The increase in revenue in 2004, compared to the same period in 2003, also included the
recognition of deferred revenues of $0.8 million related to a former client.
Direct Salaries and Related Costs
Direct salaries and related costs decreased $8.9 million or 2.9% to $300.6 million for 2004,
from $309.5 million in 2003. Excluding the negative foreign currency impact of $11.0 million
related to the strengthening Euro in 2004 compared to the Euro in 2003, direct salaries and related
costs decreased $19.9 million compared with last year. This
26
decrease was due to lower direct and indirect salaries and related benefits primarily attributable
to an overall reduction in U.S. customer call volumes. This decrease was offset by 1) higher
telephone costs related to transporting calls offshore, 2) higher staffing and training costs
associated with the ramp-up offshore and certain duplicative costs as we simultaneously ramped-down
U.S. customer contact management centers, 3) termination costs related to the consolidation of two
European customer contact management centers and 4) higher claim costs associated with our
automotive program in Canada related to higher fuel costs and the severe Canada winter. The
migration offshore was substantially complete at the end of the third quarter of 2004. As a
percentage of revenues, direct salaries and related costs was 64.4% in both 2004 and 2003.
General and Administrative
General and administrative expenses increased $3.5 million or 2.2% to $165.2 million for 2004,
from $161.7 million in 2003. Excluding the negative foreign currency impact of $4.6 million related
to the strengthening Euro in 2004 compared to the Euro in 2003, general and administrative expenses
decreased $1.1 million compared with last year. This decrease was principally attributable to a
decrease in depreciation expense of $1.0 million related to the 2003 expiration of two technology
client contracts, lower insurance costs, technology related costs and bad debts. This decrease was
partially offset by 1) higher compliance costs of $3.3 million related to the Sarbanes-Oxley Act,
2) compensation costs of $1.7 million related to the former chairmans retirement and 3) lease and
utilities costs associated with expansion of offshore facilities. As a percentage of revenues,
general and administrative expenses increased to 35.4% in 2004 from 33.7% in 2003.
Net Gain on Disposal of Property and Equipment
The net gain on disposal of property and equipment of $6.9 million for 2004 includes a $2.8
million net gain on the sale of our Hays, Kansas facility, a $2.7 million net gain on the sale of
our Klamath Falls, Oregon facility, a $0.1 million net gain on the sale of a parcel of land at our
Pikeville, Kentucky facility and a $1.5 million net gain on the sale of our Eveleth, Minnesota
facility, offset by a $0.2 million loss on disposal of property and equipment. This compares to a
$1.6 million net gain on disposal of property and equipment, which includes a $1.9 million net gain
on the sale of our Scottsbluff, Nebraska facility (closed in connection with the 2002 restructuring
plan) and a $0.2 million portion of the net gain related to the installment sale of our Eveleth,
Minnesota facility offset by a $0.5 million loss on disposal of property and equipment.
Net Gain on Insurance Settlement
In September 2004, the building and contents of our customer contact management center located
in Marianna, Florida was severely damaged by Hurricane Ivan. Upon settlement with the insurer in
December 2004, we recognized a net gain of $5.4 million after write-off of the property and
equipment, which had a net book value of $3.4 million, net of the related deferred grants of $2.2
million. In December 2004, we donated the underlying land to the city with $0.1 million to assist
with the site demolition and clean up of the property with no further obligation of the Company.
Reversal of Restructuring and Other Charges
In 2004, restructuring and other charges included a $0.1 million reversal of certain charges
related to the remaining lease termination and closure costs for two European customer contact
management centers and one European fulfillment center.
In 2003, restructuring and other charges included a $0.6 million reversal of certain charges
related to the final termination settlements for the closure of two of our European customer
contact management centers and one European fulfillment center, the remaining site closure costs
for our Galashiels, Scotland print facility and our Scottsbluff, Nebraska facility, which were both
sold in 2003, offset by additional accruals related to the final settlement of certain lease
termination and site closure costs.
Impairment of Long-Lived Assets
During 2004, we recorded a charge for impairment of long-lived assets of $0.7 million related
to certain property and equipment in Bangalore, India as a result of our plans to migrate the call
volumes of the customer contact management services and related operations in India to other
facilities in the Asia Pacific region in 2005.
27
Interest Income
Interest income increased to $2.4 million in 2004 from $2.1 million in 2003 including $0.8
million of interest received on a foreign income tax refund in 2004.
Interest Expense
Interest expense of $0.8 million in 2004 was primarily unchanged as compared to 2003.
Income from Rental Operations, Net
Income from rental operations, net increased to $0.2 million in 2004 from zero in 2003 as a
result of the Companys leasing of a customer contact management facility in 2004.
Other Income and Expense
Other income increased to $1.4 million in 2004 from $1.3 million in 2003. This increase was
primarily attributable to a $0.4 million increase in other miscellaneous income offset by a $0.3
million decrease in foreign currency translation gains, net of losses including $0.7 million
related to the liquidation of a foreign entity. Other income excludes the effects of cumulative
translation effects included in Accumulated Other Comprehensive Income (Loss) in shareholders
equity in the accompanying Consolidated Balance Sheets.
Provision (Benefit) for Income Taxes
The 2004 provision for income taxes of $5.1 million was based upon pre-tax book income of
$15.9 million, compared to the 2003 provision for income taxes of $4.7 million based upon a pre-tax
book income of $14.0 million. The $0.4 million change was primarily attributable to the $1.9
million change in pre-tax book income. The effective tax rate was 31.8% for 2004 and 33.3% for
2003. This decrease in the effective tax rate resulted from a shift in our mix of earnings within
tax jurisdictions and the related effects of permanent differences, foreign withholding taxes,
income tax credits, state income taxes and foreign income tax rate differentials (including tax
holiday jurisdictions) offset by a requisite valuation allowance for the year-to-date United States
tax loss benefit provided during the second, third and fourth quarters of 2004 (partially reduced
by the reversal of certain specific tax contingency reserves).
Net Income
As a result of the foregoing, we reported income from operations for 2004 of $12.6 million, an
increase of $1.2 million from 2003. This increase was principally attributable to an $8.9 million
decrease in direct salaries and related costs, a $5.3 million increase in net gain on disposal of
property and equipment and a $5.4 million net gain on insurance settlement offset by a $13.7
million decrease in revenues, a $3.5 million increase in general and administrative costs, a $0.7
million increase in impairment of long-lived assets and a $0.5 million decrease in reversals of
restructuring and other charges, as previously discussed. The $1.2 million increase in income from
operations and a net increase in interest income, interest expense, income from rental operations,
net and other income of $0.7 million were offset by a $0.4 million higher tax provision, resulting
in net income of $10.8 million for 2004, an increase of $1.5 million compared to 2003.
28
Quarterly Results
The following information presents our unaudited quarterly operating results for 2005 and
2004. The data has been prepared on a basis consistent with the Consolidated Financial Statements
included elsewhere in this Form 10-K, and include all adjustments, consisting of normal recurring
accruals that we consider necessary for a fair presentation thereof.
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/05 |
|
|
9/30/05 |
|
|
6/30/05 |
|
|
3/31/05 |
|
|
12/31/04 |
|
|
9/30/04 |
|
|
6/30/04 |
|
|
3/31/04 |
|
Revenues |
|
$ |
128,756 |
|
|
$ |
122,596 |
|
|
$ |
122,194 |
|
|
$ |
121,372 |
|
|
$ |
120,713 |
|
|
$ |
111,507 |
|
|
$ |
113,450 |
|
|
$ |
121,043 |
|
Direct salaries and related
costs(1) |
|
|
80,902 |
|
|
|
75,247 |
|
|
|
76,026 |
|
|
|
77,429 |
|
|
|
72,766 |
|
|
|
70,578 |
|
|
|
73,867 |
|
|
|
83,389 |
|
General and administrative(2) |
|
|
38,824 |
|
|
|
40,387 |
|
|
|
41,369 |
|
|
|
39,890 |
|
|
|
41,303 |
|
|
|
41,338 |
|
|
|
41,315 |
|
|
|
41,276 |
|
Net (gain) loss on disposal of
property and equipment(3) |
|
|
(35 |
) |
|
|
(47 |
) |
|
|
(1,627 |
) |
|
|
(69 |
) |
|
|
94 |
|
|
|
(2,874 |
) |
|
|
(1,394 |
) |
|
|
(2,741 |
) |
Net gain on insurance
settlement(4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and other charges
(reversals) (5) |
|
|
|
|
|
|
|
|
|
|
(56 |
) |
|
|
(258 |
) |
|
|
(113 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of long-lived
assets(6) |
|
|
|
|
|
|
605 |
|
|
|
|
|
|
|
|
|
|
|
690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
9,065 |
|
|
|
6,404 |
|
|
|
6,482 |
|
|
|
4,380 |
|
|
|
11,351 |
|
|
|
2,465 |
|
|
|
(338 |
) |
|
|
(881 |
) |
Interest income |
|
|
894 |
|
|
|
719 |
|
|
|
496 |
|
|
|
450 |
|
|
|
476 |
|
|
|
359 |
|
|
|
1,097 |
|
|
|
513 |
|
Interest expense |
|
|
(95 |
) |
|
|
(113 |
) |
|
|
(385 |
) |
|
|
(74 |
) |
|
|
(180 |
) |
|
|
(242 |
) |
|
|
(233 |
) |
|
|
(118 |
) |
Income from rental
operations, net |
|
|
593 |
|
|
|
337 |
|
|
|
114 |
|
|
|
(104 |
) |
|
|
103 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
(781 |
) |
|
|
335 |
|
|
|
704 |
|
|
|
(318 |
) |
|
|
(242 |
) |
|
|
(160 |
) |
|
|
1,029 |
|
|
|
814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for
income taxes |
|
|
9,676 |
|
|
|
7,682 |
|
|
|
7,411 |
|
|
|
4,334 |
|
|
|
11,508 |
|
|
|
2,470 |
|
|
|
1,555 |
|
|
|
328 |
|
Provision for income taxes |
|
|
1,080 |
|
|
|
812 |
|
|
|
2,434 |
|
|
|
1,369 |
|
|
|
3,084 |
|
|
|
1,398 |
|
|
|
481 |
|
|
|
84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,596 |
|
|
$ |
6,870 |
|
|
$ |
4,977 |
|
|
$ |
2,965 |
|
|
$ |
8,424 |
|
|
$ |
1,072 |
|
|
$ |
1,074 |
|
|
$ |
244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per basic share(7) |
|
$ |
0.22 |
|
|
$ |
0.17 |
|
|
$ |
0.13 |
|
|
$ |
0.08 |
|
|
$ |
0.21 |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average basic
shares |
|
|
39,282 |
|
|
|
39,291 |
|
|
|
39,289 |
|
|
|
39,195 |
|
|
|
39,197 |
|
|
|
39,189 |
|
|
|
39,882 |
|
|
|
40,216 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share(7) |
|
$ |
0.22 |
|
|
$ |
0.17 |
|
|
$ |
0.13 |
|
|
$ |
0.08 |
|
|
$ |
0.21 |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average diluted
shares |
|
|
39,723 |
|
|
|
39,566 |
|
|
|
39,445 |
|
|
|
39,339 |
|
|
|
39,304 |
|
|
|
39,259 |
|
|
|
39,998 |
|
|
|
40,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The quarter ended December 31, 2005 includes a $0.5 million charge for termination costs
associated with exit activities in Germany and a $0.6 million year-end bonus accrual. |
|
(2) |
|
The quarter ended December 31, 2005 includes a $0.5 million reversal of bad debt expense and a
$0.4 million reversal of certain bonus accruals. The quarter ended September 30, 2004 includes
a $2.3 million estimated compensation accrual related to the Chairmans retirement and the
quarter ended December 31, 2004 includes a $0.6 million reversal of part of this accrual
related to life insurance premiums to be paid directly to the insurer over the policy period
rather than to the insured in a lump sum. |
|
(3) |
|
The quarters ended June 30, 2005 and December 31, 2005 include a net gain of $1.7 million
related to the sale of the Greeley, Colorado facility, and $0.1 million related to the sale of
a parcel of land in Klamath Falls, Oregon, respectively. The quarters ended September 30, 2004,
June 30, 2004 and March 31, 2004 include a net gain of $2.8 million related to the sale of the
Hays, Kansas facility, $1.6 million related to the sales of the Eveleth, Minnesota facility and
the parcel of land at our Pikeville, Kentucky facility and $2.7 million related to the sale of
the Klamath Falls, Oregon facility, respectively. |
|
(4) |
|
The quarter ended December 31, 2004 includes a net gain on insurance settlement of $5.4 million. |
|
(5) |
|
The quarters ended June 30, 2005, March 31, 2005 and December 31, 2004 include a reversal of
restructuring and other charges of $0.1 million, $0.2 million and $0.1 million, respectively. |
|
(6) |
|
The quarters ended September 30, 2005 and December 31, 2004 include a $0.6 million and $0.7
million charge associated with the impairment of long-lived assets, respectively. |
|
(7) |
|
Net income (loss) per basic and diluted share are computed independently for each of the
quarters presented and therefore may not sum to the total for the year. |
29
Liquidity and Capital Resources
Our primary sources of liquidity are generally cash flows generated by operating activities
and from available borrowings under our revolving credit facilities. We utilize these capital
resources to make capital expenditures associated primarily with our customer contact management
services, invest in technology applications and tools to further develop our service offerings and
for working capital and other general corporate purposes, including repurchase of our common stock
in the open market and to fund possible acquisitions. In future periods, we intend similar uses of
these funds.
On August 5, 2002, the Board of Directors authorized the Company to purchase up to three
million shares of our outstanding common stock. A total of 1.6 million shares have been
repurchased under this program since inception. The shares are purchased, from time to time,
through open market purchases or in negotiated private transactions, and the purchases are based on
factors, including but not limited to, the stock price and general market conditions. During the
year ended December 31, 2005, we did not repurchase common shares under the 2002 repurchase
program.
During the year ended December 31, 2005, we generated $48.2 million in cash from operating
activities and received $0.8 million in cash from issuance of stock and $2.7 million in cash from
the sale of facilities, property and equipment. Further, we used $9.9 million in funds for capital
expenditures, $3.2 million to purchase the stock of Kelly, Luttmer & Associates Limited, $0.4
million to purchase investments and $0.1 million to repay long-term debt resulting in a $33.7
million increase in available cash (including the unfavorable effects of international currency
exchange rates on cash of $4.4 million).
Net cash flows provided by operating activities for the year ended December 31, 2005 were
$48.2 million, compared to net cash flows provided by operating activities of $13.7 million for the
year ended December 31, 2004. The $34.5 million increase in net cash flows from operating
activities was due to an increase in net income of $12.6 million, a $19.2 million net change in
assets and liabilities and a $2.7 million increase in non-cash reconciling items such as deferred
income taxes and a net gain on disposal of property and equipment. This $19.2 million net change in
assets and liabilities was principally a result of a $7.9 million decrease in receivables, a $5.1
million increase in deferred revenue, a $3.9 million increase in accounts payable, a $3.9 million
increase in accrued employee compensation, and a $4.6 million increase in other liabilities offset
by a $4.3 million increase in other assets and a $1.9 million decrease in taxes payable.
Capital expenditures, which are generally funded by cash generated from operating activities
and borrowings available under our credit facilities, were $9.9 million for the year ended December
31, 2005, compared to $25.7 million for the year ended December 31, 2004, a decrease of $15.8
million, which was driven primarily by lower investments in offshore facilities. During the year
ended December 31, 2005, approximately 32% of the capital expenditures were the result of investing
in new and existing customer contact management centers, primarily offshore, and 68% was expended
primarily for maintenance and systems infrastructure. In 2006, we anticipate capital expenditures
in the range of $12.0 million to $16.0 million.
An available source of future cash flows from financing activities is from borrowings under
our $50.0 million revolving credit facility (the Credit Facility), which amount is subject to
certain borrowing limitations. Pursuant to the terms of the Credit Facility, the amount of $50.0
million may be increased up to a maximum of $100.0 million with the prior written consent of the
lenders. The $50.0 million Credit Facility includes a $10.0 million swingline subfacility, a $15.0
million letter of credit subfacility and a $40.0 million multi-currency subfacility.
The Credit Facility, which includes certain financial covenants, may be used for general
corporate purposes including acquisitions, share repurchases, working capital support, and letters
of credit, subject to certain limitations. The Credit Facility, including the multi-currency
subfacility, accrues interest, at our option, at (a) the Base Rate (defined as the higher of the
lenders prime rate or the Federal Funds rate plus 0.50%) plus an applicable margin up to 0.50%, or
(b) the London Interbank Offered Rate (LIBOR) plus an applicable margin up to 2.25%. Borrowings
under the swingline subfacility accrue interest at the prime rate plus an applicable margin up to
0.50% and borrowings under the letter of credit subfacility accrue interest at the LIBOR plus an
applicable margin up to 2.25%. In addition, a commitment fee of up to 0.50% is charged on the
unused portion of the Credit Facility on a quarterly basis. The borrowings under the Credit
Facility, which will terminate on March 14, 2008, are secured by a pledge of 65% of the stock of
each of our active direct foreign subsidiaries. The Credit Facility prohibits us from incurring
additional indebtedness, subject to certain specific exclusions. There were no borrowings in 2005
and 2004 and no
30
outstanding balances as of December 31, 2005 and 2004 with $50.0 million availability under the
Credit Facility. At December 31, 2005, we were in compliance with all loan requirements of the
Credit Facility.
At December 31, 2005, we had $127.6 million in cash, of which approximately $86.3 million was
held in international operations and may be subject to additional taxes if repatriated to the
United States. On October 22, 2004 the President signed the American Jobs Creation Act of 2004
(the Act). The Act created a temporary incentive for U.S. corporations to repatriate accumulated
income earned abroad by providing an 85 percent dividends received deduction for certain dividends
from controlled foreign corporations. The incentive was only available in 2005 and was subject to
a number of limitations. Based on a cost-benefit analysis, the Company decided not to repatriate
any foreign income under the Act.
We believe that our current cash levels, accessible funds under our credit facilities and cash
flows from future operations will be adequate to meet anticipated working capital needs, future
debt repayment requirements (if any), continued expansion objectives, anticipated levels of capital
expenditures and contractual obligations for the foreseeable future and stock repurchases.
Off-Balance Sheet Arrangements and Other
At December 31, 2005, we did not have any material commercial commitments, including
guarantees or standby repurchase obligations, or any relationships with unconsolidated entities or
financial partnerships, including entities often referred to as structured finance or special
purpose entities or variable interest entities, which would have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
From time to time, during the normal course of business, we may make certain
indemnities, commitments and guarantees under which we may be required to make payments in relation
to certain transactions. These include, but are not limited to: (i) indemnities to clients, vendors
and service providers pertaining to claims based on negligence or willful misconduct
and (ii) indemnities involving breach of contract, the accuracy of representations and warranties,
or other liabilities assumed by us in certain contracts. In addition, we have
agreements whereby we will indemnify certain officers and directors for certain events
or occurrences while the officer or director is, or was, serving at our request in such
capacity. The indemnification period covers all pertinent events and occurrences during the
officers or directors lifetime. The maximum potential amount of future payments we could
be required to make under these indemnification agreements is unlimited; however, we have
director and officer insurance coverage that limits our exposure and enables us to recover a
portion of any future amounts paid. We believe the applicable insurance coverage is
generally adequate to cover any estimated potential liability under these indemnification
agreements. The majority of these indemnities, commitments and guarantees do not provide for any
limitation of the maximum potential for future payments we could be obligated to make. We have
not recorded any liability for these indemnities, commitments and other guarantees in
the accompanying Consolidated Balance Sheets. In addition, we have some client contracts
that do not contain contractual provisions for the limitation of liability, and other client
contracts that contain agreed upon exceptions to limitation of liability. We have not
recorded any liability in the accompanying Consolidated Balance Sheets with respect to any client
contracts under which we have or may have unlimited liability.
31
Contractual Obligations
The following table summarizes our contractual cash obligations at December 31, 2005, and the
effect these obligations are expected to have on liquidity and cash flow in future periods (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Period |
|
|
|
|
|
|
|
Less Than 1 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Year |
|
|
1 - 3 Years |
|
|
4 - 5 Years |
|
|
After 5 Years |
|
Operating leases (1) |
|
$ |
38,285 |
|
|
$ |
11,562 |
|
|
$ |
8,697 |
|
|
$ |
6,930 |
|
|
$ |
11,096 |
|
Purchase obligations (2) |
|
|
15,354 |
|
|
|
12,198 |
|
|
|
3,156 |
|
|
|
|
|
|
|
|
|
Other long-term liabilities (3) |
|
|
6 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
53,645 |
|
|
$ |
23,766 |
|
|
$ |
11,853 |
|
|
$ |
6,930 |
|
|
$ |
11,096 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amounts represent the expected cash payments of our operating leases as discussed in Note 17
to the Consolidated Financial Statements. |
|
(2) |
|
Purchase obligations include agreements to purchase goods or services that are enforceable
and legally binding on us and that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction. Purchase obligations exclude agreements that are cancelable without
penalty. |
|
(3) |
|
Other long-term liabilities, which exclude deferred income taxes, represent the expected cash
payments due minority shareholders of certain subsidiaries and others. |
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires estimations and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. These estimates and assumptions are based on historical experience and
various other factors that are believed to be reasonable under the circumstances. Actual results
could differ from these estimates under different assumptions or conditions.
We believe the following accounting policies are the most critical since these policies
require significant judgment or involve complex estimations that are important to the portrayal of
our financial condition and operating results:
§ |
|
We recognize revenue pursuant to applicable accounting standards, including SEC Staff
Accounting Bulletin (SAB) No. 101 (SAB 101), Revenue Recognition in Financial Statements,
SAB 104, Revenue Recognition and the Emerging Issues Task force (EITF) No. 00-21, (EITF
00-21)Revenue Arrangements with Multiple Deliverables. SAB 101, as amended, and SAB 104
summarize certain of the SEC staffs views in applying generally accepted accounting
principles to revenue recognition in financial statements and provide guidance on revenue
recognition issues in the absence of authoritative literature addressing a specific
arrangement or a specific industry. EITF 00-21 provides further guidance on how to account for
multiple element contracts. |
|
|
|
We recognize revenue from services as the services are performed under a fully executed
contractual agreement and record reductions to revenue for contractual penalties and holdbacks
for failure to meet specified minimum service levels and other performance based contingencies.
Royalty revenue is recognized when a contract has been fully executed, the product has been
delivered or provided, the license fees or rights are fixed and determinable, the collection of
the resulting receivable is probable and there are no other contingencies. Revisions to these
estimates, which could result in adjustments to fixed price contracts and estimated losses, are
recorded in the period when such adjustments or losses are known or can be reasonably estimated.
Product sales are recognized upon shipment to the customer and satisfaction of all obligations. |
|
|
|
We recognize revenue from licenses of our software products and rights when the agreement has
been executed, the product or right has been delivered or provided, collectibility is probable
and the software license fees or rights are fixed and determinable. If any portion of the
license fees or rights is subject to forfeiture, refund or other contractual contingencies, we
defer revenue recognition until these contingencies have been resolved. Revenue from support and
maintenance activities is recognized ratably over the term of the maintenance period |
32
|
|
and the unrecognized portion is recorded as deferred revenue. |
|
|
|
Certain contracts to sell our products and services contain multiple elements or non-standard
terms and conditions. As a result, we evaluate each contract to determine the appropriate
accounting, including whether the deliverables specified in a multiple element arrangement
should be treated as separate units of accounting for revenue recognition purposes, and if so,
how the price should be allocated among the deliverable elements and the timing of revenue
recognition for each element. We recognize revenue for delivered elements only when the fair
values of undelivered elements are known, uncertainties regarding client acceptance are
resolved, and there are no client-negotiated refund or return rights affecting the revenue
recognized for delivered elements. Once we determine the allocation of revenue between
deliverable elements, there are no further changes in the revenue allocation. |
|
§ |
|
We maintain allowances for doubtful accounts of $3.1 million as of
December 31, 2005, or 3.5% of receivables, for estimated losses
arising from the inability of our customers to make required
payments. If the financial condition of our customers were to
deteriorate, resulting in a reduced ability to make payments,
additional allowances may be required which would reduce income
from operations. |
|
§ |
|
We reduce deferred tax assets by a valuation allowance if, based
on the weight of available evidence for each respective tax
jurisdiction, it is more likely than not that some portion or all
of such deferred tax assets will not be realized. The valuation
allowance for a particular tax jurisdiction is allocated between
current and noncurrent deferred tax assets for that jurisdiction
on a pro rata basis. Available evidence which is considered in
determining the amount of valuation allowance required includes,
but is not limited to, our estimate of future taxable income and
any applicable tax-planning strategies. At December 31, 2005,
management determined that a valuation allowance of approximately
$28.8 million was necessary to reduce U.S. deferred tax assets by
$9.9 million and foreign deferred tax assets by $18.9 million,
where it was more likely than not that some portion or all of such
deferred tax assets will not be realized. The recoverability of
the remaining net deferred tax asset of $17.9 million at December
31, 2005 is dependent upon future profitability within each tax
jurisdiction. As of December 31, 2005, based on our estimates of
future taxable income and any applicable tax-planning strategies
within various tax jurisdictions, we believe that it is more
likely than not that the remaining net deferred tax asset will be
realized. (See Note 13 in the accompanying Consolidated Financial
Statements). |
|
§ |
|
We review long-lived assets, which had a carrying value of $80.3
million as of December 31, 2005, including goodwill, intangibles
and property and equipment, for impairment whenever events or
changes in circumstances indicate that the carrying value of an
asset may not be recoverable and at least annually for impairment
testing of goodwill. An asset is considered to be impaired when
the carrying amount exceeds the fair value. Upon determination
that the carrying value of the asset is impaired, we would record
an impairment charge or loss to reduce the asset to its fair
value. Future adverse changes in market conditions or poor
operating results of the underlying investment could result in
losses or an inability to recover the carrying value of the
investment and, therefore, might require an impairment charge in
the future. |
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
123R, Share-Based Payment which revises SFAS 123 and supersedes APB 25 and amends SFAS No. 95,
Statement of Cash Flows. SFAS 123R requires companies to recognize in their income statement the
grant-date fair value of stock options and other equity-based compensation issued to employees and
directors. We adopted SFAS 123R on January 1, 2006. The standard requires that compensation expense
for most equity-based awards be recognized over the requisite service period, usually the vesting
period, while compensation expense for liability-based awards (those usually settled in cash rather
than stock) be re-measured to fair-value at each balance sheet date until the award is settled.
Under SFAS 123R, the pro forma disclosures previously permitted will no longer be an alternative to
financial statement recognition. The adoption of SFAS 123R is not expected to have a material
effect on our financial condition, results of operations or cash flows as most outstanding options
were fully vested as of December 31, 2005.
We use the Black-Scholes formula to estimate the value of stock-based compensation granted to
employees and directors and expect to continue to use this option valuation model in 2006, but may
consider switching to another model in the future, if we determine that such model will produce a
better estimate of fair value. Because SFAS 123R must be applied not only to new awards, but to
previously granted awards that are not fully vested on January 1, 2006, the effective date of SFAS
123R, compensation cost for some previously granted options will be recognized under SFAS 123R.
However, had we adopted SFAS 123R in prior periods, the impact of this standard would have
33
approximated the impact described in the disclosure of pro forma net income and net income per
share in Note 1 to the consolidated financial statements.
SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash flow as previously
required.
We will use the modified prospective method, which requires us to record compensation expense
for the non-vested portion of previously issued awards that remain outstanding at the initial date
of adoption and to record compensation expense for any awards issued or modified after January 1,
2006.
In March 2005, the SEC issued SAB 107 (SAB 107), Share-Based Payments, which provides
guidance on valuation methods available and guidance on other related matters in applying the
provisions of SFAS 123R. We adopted the provisions of SAB 107 in conjunction with the adoption of
SFAS 123R on January 1, 2006.
In October 2005, the FASB issued FASB Staff Position FAS No. 123R-2 (SFAS 123R-2), Practical
Accommodation to the Application of Grant Date as Defined in FAS 123R. SFAS 123R-2 provides
guidance on the application of grant date as defined in SFAS 123R. In accordance with this
standard, a grant date of an award exists if a) the award is a unilateral grant and b) the key
terms and conditions of the award are expected to be communicated to an individual recipient within
a relatively short time period from the date of approval. We adopted SFAS 123R-2 in conjunction
with the adoption of SFAS 123R on January 1, 2006.
In November 2005, the FASB issued FASB Staff Position FAS No. 123R-3 (SFAS 123R-3),
Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.
SFAS 123R-3 provides an elective alternative method that establishes a computational component to
arrive at the beginning balance of the accumulated paid-in capital pool related to employee
compensation and a simplified method to determine the subsequent impact on the accumulated paid-in
capital pool of employee awards that are fully vested and outstanding upon the adoption of SFAS
123R on January 1, 2006. We are currently evaluating the use of this
transition method.
In March 2004, the EITF reached a consensus on Issue No. 03-1 (EITF 03-1), The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides
guidance on other-than-temporary impairment evaluations for securities accounted for under SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, and SFAS No. 124,
Accounting for Certain Investments Held by Not-for-Profit Organizations, and non-marketable
equity securities accounted for under the cost method. The EITF developed a basic three-step test
to evaluate whether an investment is other-than-temporarily impaired. In September 2004, the FASB
delayed the effective date of the recognition and measurement provisions of EITF 03-1. However, the
disclosure provisions were effective for fiscal years ending after June 15, 2004. In November 2005,
the FASB issued final FASB Staff Positions SFAS 115-1 and SFAS 124-1 (SFAS 115-1 and SFAS 124-1)
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments which
supersede EITF 03-1 and provide similar guidance. FASB Staff Position Nos. SFAS 115-1 and SFAS
124-1 are effective for fiscal years beginning after December 15, 2005. The adoption of the
recognition and measurement provisions of these standards is not expected to have a material impact
on our financial condition, results of operations or cash flows.
In June 2004, the EITF reached a consensus on Issue No. 02-14 (EITF 02-14), Whether an
Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock. EITF
02-14 addresses whether the equity method of accounting should be applied to investments when an
investor does not have an investment in voting common stock of an investee but exercises
significant influence through other means. EITF 02-14 states that an investor should only apply the
equity method of accounting when it has investments in either common stock or in-substance common
stock of a corporation, provided that the investor has the ability to exercise significant
influence over the operating and financial policies of the investee. We adopted EITF 02-14 on
January 1, 2005. The impact of this adoption did not have a material effect on our financial
condition, results of operations or cash flows.
In December 2004, the FASB issued Staff Position 109-1 (SFAS 109-1), Application of FASB
Statement 109, Accounting for Income Taxes , to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004. The Act, which was signed into law
in October 2004, provides a tax deduction on qualified domestic production activities. When fully
phased-in, the deduction will be up to 9% of the lesser of qualified production activities income
or taxable income. Based on the guidance provided by SFAS 109-1, this deduction should be accounted
for as a special deduction under SFAS 109 and will reduce tax expense in the period or periods that
the amounts are deductible on the tax return. The tax benefit resulting from the new deduction was
34
effective for 2005. The adoption of these new tax provisions did not have a material impact on our
financial condition, results of operations or cash flows.
In December 2004, the FASB issued FASB Staff Position No. SFAS 109-2 (SFAS 109-2), Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs
Creations Act of 2004. The Act introduced a limited time 85% dividends received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided
certain criteria were met. SFAS No. 109-2 provides accounting and disclosure guidance for the
repatriation provision. Based on a cost-benefit analysis, we decided not to repatriate any foreign
income under the Act.
In March 2005, the FASB issued Interpretation No. 47 (FIN 47), Accounting for Conditional
Asset Retirement Obligations that requires an entity to recognize a liability for a conditional
asset retirement obligation when incurred if the liability can be reasonably estimated. FIN 47
clarifies that the term conditional asset retirement obligation refers to a legal obligation to
perform an asset retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the entity. FIN 47 also
clarifies when an entity would have sufficient information to reasonably estimate the fair value of
an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005. The impact of this adoption did not have a material impact on our
financial condition, results of operations or cash flows.
In May 2005, the FASB issued SFAS No. 154 (SFAS 154), Accounting Changes and Error
Corrections, which requires retrospective application to prior periods financial statements for
changes in accounting principle and redefines the term restatement as the revising of previously
issued financial statements to reflect the correction of an error. Under retrospective application,
the new accounting principle is applied as of the beginning of the first period presented as if
that principle had always been used. The cumulative effect of the change is reflected in the
carrying value of assets and liabilities as of the first period presented and the offsetting
adjustments are recorded to opening retained earnings. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December 15, 2005.
In July 2005, the FASB issued an exposure draft of a proposed interpretation of SFAS No. 109,
Accounting for Income Taxes entitled Accounting for Uncertain Tax Positions. The proposed
interpretation stipulates that the benefit from a tax position should be recorded only when it is
probable that the tax position will be sustained upon audit by taxing authorities, based solely on
the technical merits of the tax position. The final issuance of this proposed interpretation, which
may be subject to significant changes, will be no earlier than the first quarter of 2006 and the
effective date has not been determined. We are currently evaluating the impact of this proposed
standard on our financial position, results of operations and cash flows.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency and Interest Rate Risk
Our earnings and cash flows are subject to fluctuations due to changes in non-U.S. currency
exchange rates. We are exposed to non-U.S. exchange rate fluctuations as the financial results of
non-U.S. subsidiaries are translated into U.S. dollars in consolidation. As exchange rates vary,
those results, when translated, may vary from expectations and adversely impact overall expected
profitability. The cumulative translation effects for subsidiaries using functional currencies
other than the U.S. dollar are included in Accumulated Other Comprehensive Income (Loss) in
shareholders equity. Movements in non-U.S. currency exchange rates may affect our competitive
position, as exchange rate changes may affect business practices and/or pricing strategies of
non-U.S. based competitors. Periodically, we use foreign currency contracts to hedge intercompany
receivables and payables, and transactions initiated in the United States that are denominated in
foreign currency. The principal foreign currency hedged is the Euro using foreign currency
contracts ranging in periods from one to three months. Foreign currency contracts are accounted for
on a mark-to-market basis, with realized and unrealized gains or losses recognized in the current
period, as we do not designate our foreign currency contracts as accounting hedges. Unrealized and
realized gains or losses related to these contracts for the three years ended December 31, 2005
were immaterial.
Our exposure to interest rate risk results from variable debt outstanding under our revolving
credit facility. Based on our level of variable rate debt outstanding during the year ended
December 31, 2005, a one-point increase in the weighted average interest rate, which generally
equals the LIBOR rate plus an applicable margin, would not have had a material impact on our annual
interest expense.
35
At December 31, 2005, we had no debt outstanding at variable interest rates. We have not
historically used derivative instruments to manage exposure to changes in interest rates.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by this item are located beginning on
page 46 and page 29 of this report, respectively.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
As of December 31, 2005, under the direction of our Chief Executive Officer and Chief
Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rule 13a 15(e) under the Securities Exchange Act of 1934,
as amended. Our disclosure controls and procedures are designed to provide reasonable assurance
that the information required to be disclosed in our SEC reports is recorded, processed, summarized
and reported within the time periods specified by the SECs rules and forms, and is accumulated and
communicated to management, including our Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure. We concluded that, as of
December 31, 2005, our disclosure controls and procedures were effective at the reasonable
assurance level.
Managements Report On Internal Control Over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934, as amended). Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting as of December
31, 2005. In making this assessment, we used the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
Based on our assessment, management believes that, as of December 31, 2005, our internal
control over financial reporting was effective.
Our independent auditors, an independent registered public accounting firm, have issued their
attestation report on our assessment of our internal control over financial reporting. This report
appears on page 38.
Changes to Internal Control Over Financial Reporting
Except as noted below, there were no significant changes in our internal control over
financial reporting during the quarter ended December 31, 2005 that materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
On November 11, 2005, we determined that certain deferred revenues should have been classified
as current liabilities rather than long-term liabilities in the Consolidated Balance Sheets as of
December 31, 2003 and thereafter. These deferred revenues relate to various contracts in our
Canadian roadside assistance program for which we are prepaid for roadside assistance services that
are generally carried out over a twelve-month or longer period. Accordingly, previously issued
financial statements for the year ended December 31, 2004 were restated to correct the
classification of deferred revenue and the related deferred income taxes. We concluded that the
deferred revenue classification error was primarily the result of a failure in the design of the
existing controls surrounding the review of non-U.S. non-routine contracts to ensure that such
contracts are recorded in accordance with generally accepted accounting principles in the United
States. We also concluded that this deficiency in internal controls
36
constituted a material weakness, as defined by the Public Company Accounting Oversight Boards
Auditing Standard No. 2.
Subsequent to November 11, 2005, we made changes to our internal control over financial
reporting that remediated such weakness, including the establishment of additional controls to
improve the internal control process with respect to the accounting for non-U.S. non-routine
contracts. The changes included a more formal process to document and review the terms and
conditions of all significant contracts, including non-U.S. non-routine contracts, to ensure that
such contracts are recorded in accordance with accounting principles generally accepted in the
United States. This process is completed at the inception of the contract and monitored during the
term of the contract to ensure all and any changes to the contract are accounted for appropriately.
As a result of these remedial actions, we concluded that this change in procedures strengthens
our disclosure controls and procedures, as well as our internal control over financial reporting,
with respect to the accounting for non-U.S. non-routine contracts and therefore the above described
material weakness was remediated as of December 31, 2005. We have discussed this material weakness
and our remediation actions with our Audit Committee.
37
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Sykes Enterprises, Incorporated
Tampa, Florida
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control over Financial Reporting, as included in Item 9A, Controls and Procedures, that
Sykes Enterprises, Incorporated and subsidiaries (the Company) maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Companys management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on managements assessment and an opinion on
the effectiveness of the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions.
A companys internal control over financial reporting is a process designed by, or under the
supervision of, the companys principal executive and principal financial officers, or persons
performing similar functions, and effected by the companys Board of Directors, management, and
other personnel to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over financial reporting to future periods
are subject to the risk that the controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that the Company maintained effective internal control over
financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on
the criteria established in Internal ControlIntegrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31,
2005, based on the criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial statement schedule as of
and for the year ended December 31, 2005 of the Company and our report dated March 14, 2006
expressed an unqualified opinion on those financial statements and financial statement schedule.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 14, 2006
38
Item 9B. Other Information
None.
PART III
Items 10. through 14.
All information required by Items 10 through 14, with the exception of information on
Executive Officers which appears in this report in Item 1 under the caption Executive Officers,
is incorporated by reference to SYKES Proxy Statement for the 2006 Annual Meeting of Shareholders.
39
PART IV
Item 15. Exhibits and Financial Statement Schedule
The following documents are filed as part of this report:
|
(1) |
|
Consolidated Financial Statements |
|
|
|
|
The Index to Consolidated Financial Statements is set forth on page 46 of this report. |
|
|
(2) |
|
Financial Statements Schedule |
|
|
|
|
Schedule II Valuation and Qualifying Accounts is set forth on page 80 of this report. |
|
|
(3) |
|
Exhibits: |
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
2.1
|
|
Articles of Merger between Sykes Enterprises, Incorporated, a North Carolina Corporation, and Sykes
Enterprises, Incorporated, a Florida Corporation, dated March 1, 1996. (1) |
|
|
|
2.2
|
|
Articles of Merger between Sykes Enterprises, Incorporated and Sykes Realty, Inc. (1) |
|
|
|
2.3
|
|
Shareholder Agreement dated December 11, 1997, by and among Sykes Enterprises, Incorporated and
HealthPlan Services Corporation. (2) |
|
|
|
2.4
|
|
Stock Purchase Agreement, dated September 1, 1998, between Sykes Enterprises, Incorporated and
HealthPlan Services Corporation. (4) |
|
|
|
2.5
|
|
Merger Agreement, dated as of June 9, 2000, among Sykes Enterprises, Incorporated, SHPS, Incorporated,
Welsh Carson Anderson and Stowe, VIII, LP (WCAS) and Slugger Acquisition Corp. (11) |
|
|
|
2.6
|
|
Share Purchase Agreement, dated as of March 1, 2005, among Sykes Canada Corporation and the
shareholders of Kelly, Luttmer & Associates Ltd and 765448 Alberta Limited. (27) |
|
|
|
3.1
|
|
Articles of Incorporation of Sykes Enterprises, Incorporated, as amended. (5) |
|
|
|
3.2
|
|
Articles of Amendment to Articles of Incorporation of Sykes Enterprises, Incorporated, as amended.
(6) |
|
|
|
3.3
|
|
Bylaws of Sykes Enterprises, Incorporated, as amended. (27) |
|
|
|
4.1
|
|
Specimen certificate for the Common Stock of Sykes Enterprises, Incorporated. (1) |
|
|
|
10.1
|
|
1996 Employee Stock Option Plan. (1)* |
|
|
|
10.2
|
|
Amended and Restated 1996 Non-Employee Director Stock Option Plan. (12)* |
|
|
|
10.3
|
|
1996 Non-Employee Directors Fee Plan. (1)* |
|
|
|
10.4
|
|
2004 Non-Employee Directors Fee Plan. (23)* |
|
|
|
10.5
|
|
Form of Split Dollar Plan Documents. (1)* |
|
|
|
10.6
|
|
Form of Split Dollar Agreement. (1)* |
|
|
|
10.7
|
|
Form of Indemnity Agreement between Sykes Enterprises, Incorporated and directors & executive officers.
(1) |
|
|
|
10.8
|
|
Tax Indemnification Agreement between Sykes Enterprises, Incorporated and John H. Sykes. (1)* |
|
|
|
10.9
|
|
1997 Management Stock Incentive Plan. (3)* |
40
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
10.10
|
|
1999 Employees Stock Purchase Plan. (7)* |
|
|
|
10.11
|
|
2000 Stock Option Plan. (8)* |
|
|
|
10.12
|
|
2001 Equity Incentive Plan. (13)* |
|
|
|
10.13
|
|
Deferred Compensation Plan (27)* |
|
|
|
10.14
|
|
2004 Non-Employee Director Stock Option Plan (21)* |
|
|
|
10.15
|
|
Amended and Restated Executive Employment Agreement dated as of October 1, 2001 between Sykes
Enterprises, Incorporated and John H. Sykes. (15)* |
|
|
|
10.16
|
|
Founders Retirement and Consulting Agreement dated December 10, 2004 between Sykes Enterprises,
Incorporated and John H. Sykes. (24)* |
|
|
|
10.17
|
|
Stock Option Agreement dated as of January 8, 2002, between Sykes Enterprises, Incorporated and John H.
Sykes. (15)* |
|
|
|
10.18
|
|
Employment Agreement dated as of January 1, 2004, between Sykes Enterprises, Incorporated and Charles
E. Sykes. (20)* |
|
|
|
10.19
|
|
Amendment Number 1 to Exhibit A of the Employment Agreement between Sykes Enterprises, Incorporated
and Charles E. Sykes dated January 1, 2004. (23)* |
|
|
|
10.20
|
|
Employment Agreement dated as of August 1, 2004 between Sykes Enterprises, Incorporated and Charles E.
Sykes. (27)* |
|
|
|
10.21
|
|
First Amendment to Employment Agreement dated as of July 28, 2005 between Sykes Enterprises,
Incorporated and Charles E. Sykes. * |
|
|
|
10.22
|
|
Second Amendment to Employment Agreement dated as of January 30, 2006, between Sykes Enterprises,
Incorporated and Charles E. Sykes. (31)* |
|
|
|
10.23
|
|
Stock Option Agreement dated as of March 15, 2002 between Sykes Enterprises, Incorporated and Charles
E. Sykes. (16)* |
|
|
|
10.24
|
|
Stock Option Agreement (Performance Accelerated Option) dated as of March 15, 2002 between Sykes
Enterprises, Incorporated and Charles E. Sykes. (16)* |
|
|
|
10.25
|
|
Employment Agreement dated as of March 6, 2000 between Sykes Enterprises, Incorporated and David L.
Grimes. (9)* |
|
|
|
10.26
|
|
Employment Separation Agreement dated November 10, 2000 between Sykes Enterprises, Incorporated and
David L. Grimes. (10)* |
|
|
|
10.27
|
|
Amended and Restated Employment Agreement dated as of October 1, 2001, between Sykes Enterprises,
Incorporated and W. Michael Kipphut. (15) * |
|
|
|
10.28
|
|
Employment Agreement dated as of March 6, 2004, between Sykes Enterprises, Incorporated and W. Michael
Kipphut. (23)* |
|
|
|
10.29
|
|
Employment Agreement dated as of March 6, 2005, between Sykes Enterprises, Incorporated and W. Michael
Kipphut. (26)* |
|
|
|
10.30
|
|
Stock Option Agreement dated as of October 1, 2001, between Sykes Enterprises, Incorporated and W.
Michael Kipphut. (15)* |
|
|
|
10.31
|
|
Employment Agreement dated as of March 5, 2004, between Sykes Enterprises, Incorporated and Jenna R.
Nelson. (20)* |
41
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
10.32
|
|
Stock Option Agreement dated as of March 11, 2002 between Sykes Enterprises, Incorporated and Jenna R.
Nelson. (16)* |
|
|
|
10.33
|
|
Employment Agreement dated as of March 5, 2004, between Sykes Enterprises, Incorporated and Gerry L.
Rogers. (20)* |
|
|
|
10.34
|
|
Independent Subcontractor Agreement dated as of July 27, 2004 between Sykes Enterprises, Incorporated
and Gerry L. Rogers. (27)* |
|
|
|
10.35
|
|
First Amendment to Independent Subcontractor Agreement dated as of July 27, 2004 between Sykes
Enterprises, Incorporated and Gerry L. Rogers. (27)* |
|
|
|
10.36
|
|
Stock Option Agreement dated as of March 11, 2002 between Sykes Enterprises, Incorporated and Gerry
Rogers. (16)* |
|
|
|
10.37
|
|
Employment Agreement dated as of April 1, 2003, between Sykes Enterprises, Incorporated and James T.
Holder. (20)* |
|
|
|
10.38
|
|
Employment Agreement dated as of July 22, 2005, between Sykes Enterprises, Incorporated and James T.
Holder. (29)* |
|
|
|
10.39
|
|
Employment Agreement dated as of January 3, 2006, between Sykes Enterprises, Incorporated and James T.
Holder. (31)* |
|
|
|
10.40
|
|
Stock Option Agreement dated as of October 1, 2001, between Sykes Enterprises, Incorporated and James
T. Holder. (15)* |
|
|
|
10.41
|
|
Amended and Restated Employment Agreement dated as of March 6, 2002, between Sykes Enterprises,
Incorporated and Harry A. Jackson, Jr. (15)* |
|
|
|
10.42
|
|
Employment Separation Agreement, Waiver and Release dated as of June 9, 2003 between Sykes Enterprises,
Incorporated and Harry A. Jackson, Jr. (19)* |
|
|
|
10.43
|
|
Stock Option Agreement dated as of March 6, 2002 between Sykes Enterprises, Incorporated and Harry A.
Jackson, Jr. (16)* |
|
|
|
10.44
|
|
Stock Option Agreement dated as of December 23, 2002 between Sykes Enterprises, Incorporated and Harry
A. Jackson, Jr. (18)* |
|
|
|
10.45
|
|
Employment Agreement dated as of April 1, 2003, between Sykes Enterprises, Incorporated and William N.
Rocktoff. (20)* |
|
|
|
10.46
|
|
Employment Agreement dated as of July 22, 2005, between Sykes Enterprises, Incorporated and William N.
Rocktoff. (29)* |
|
|
|
10.47
|
|
Employment Agreement dated as of January 3, 2006, between Sykes Enterprises, Incorporated and William
N. Rocktoff. (31)* |
|
|
|
10.48
|
|
Stock Option Agreement dated as of March 18, 2002 between Sykes Enterprises, Incorporated and William
Rocktoff. (16)* |
|
|
|
10.49
|
|
Stock Option Agreement dated as of March 18, 2002 between Sykes Enterprises, Incorporated and William
Rocktoff. (16)* |
|
|
|
10.50
|
|
Employment Separation Agreement dated as of November 5, 2001, between Sykes Enterprises, Incorporated
and Mitchell Nelson. (15)* |
|
|
|
10.51
|
|
Employment Agreement dated as of September 2, 2003, between Sykes Enterprises, Incorporated and James
C. Hobby. (20)* |
42
|
|
|
Exhibit |
|
|
Number |
|
Exhibit Description |
10.52
|
|
Employment Agreement dated as of January 3, 2005 between Sykes Enterprises, Incorporated and James
Hobby, Jr. (25)* |
|
|
|
10.53
|
|
Employment Agreement dated as of October 6, 2003, between Sykes Enterprises, Incorporated and Daniel L.
Hernandez. (20)* |
|
|
|
10.54
|
|
Employment Agreement dated as of January 3, 2006, between Sykes Enterprises, Incorporated and Daniel L.
Hernandez. (31)* |
|
|
|
10.55
|
|
Employment Agreement dated as of June 15, 2004 between Sykes Enterprises, Incorporated and David L.
Pearson. (23)* |
|
|
|
10.56
|
|
Employment Agreement dated as of September 13, 2005 between Sykes Enterprises, Incorporated and David
L. Pearson. (30)* |
|
|
|
10.57
|
|
Employment Agreement dated as of January 3, 2006 between Sykes Enterprises, Incorporated and Lawrence
R. Zingale. (31)* |
|
|
|
10.58
|
|
Senior Revolving Credit Facility between SunTrust, Wachovia and BNP Paribas and Sykes Enterprises,
Incorporated dated as of April 5, 2002 and Schedule I-1. (16) |
|
|
|
10.59
|
|
Amendment No. 1 to Revolving Credit Agreement without exhibits between Sun Trust, Wachovia and BNP
Paribas and Sykes Enterprises, Incorporated dated as of September 30, 2002. (17) |
|
|
|
10. 60
|
|
Amendment No. 2 to Revolving Credit Agreement between SunTrust Bank, Wachovia Bank and BNP Paribas and
Sykes Enterprises, Incorporated dated as of June 30, 2003. (19) |
|
|
|
10.61
|
|
Credit Agreement Among Sykes Enterprises, Incorporated and Keybank National Association and BNP Paribas
dated March 15, 2004. (22) |
|
|
|
10.62
|
|
Amendment No. 1 to Credit Agreement Among Sykes Enterprises, Incorporated and Keybank National
Association and BNP Paribas dated October 18, 2004. (27) |
|
|
|
10.63
|
|
Amendment No. 2 to Credit Agreement Among Sykes Enterprises, Incorporated and Keybank National
Association and BNP Paribas dated May 25, 2005. (28) |
|
|
|
14.1
|
|
Code of Ethics (21) |
|
|
|
21.1
|
|
List of subsidiaries of Sykes Enterprises, Incorporated. |
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm. |
|
|
|
24.1
|
|
Power of Attorney relating to subsequent amendments (included on the signature page of this report). |
|
|
|
31.1
|
|
Certification of Chief Executive Officer, pursuant to Rule 13a-14(a). |
|
|
|
31.2
|
|
Certification of Chief Financial Officer, pursuant to Rule 13a-14(a). |
|
|
|
32.1
|
|
Certification of Chief Executive Officer, pursuant to Section 1350. |
|
|
|
32.2
|
|
Certification of Chief Financial Officer, pursuant to Section 1350. |
|
|
|
* |
|
Indicates management contract or compensatory plan or arrangement |
|
(1) |
|
Filed as an Exhibit to the Registrants Registration Statement on
Form S-1 (Registration No. 333-2324) and incorporated herein by
reference. |
|
(2) |
|
Filed as Exhibit 2.12 to the Registrants Form 10-K filed with the
Commission on March 16, 1998, and incorporated herein by reference. |
|
(3) |
|
Filed as Exhibit 10 to the Registrants Form 10-Q filed with the
Commission on July 28, 1998, and incorporated herein by reference. |
|
(4) |
|
Filed as Exhibit 2.1 to the Registrants Current Report on Form 8-K
filed with the Commission on September 25, 1998, and incorporated
herein by reference. |
43
|
|
|
(5) |
|
Filed as Exhibit 3.1 to the Registrants Registration Statement on
Form S-3 filed with the Commission on October 23, 1997, and
incorporated herein by reference. |
|
(6) |
|
Filed as Exhibit 3.2 to the Registrants Form 10-K filed with the
Commission on March 29, 1999, and incorporated herein by reference. |
|
(7) |
|
Filed as Exhibit 10.19 to the Registrants Form 10-K filed with the
Commission on March 29, 1999, and incorporated herein by reference. |
|
(8) |
|
Filed as Exhibit 10.23 to the Registrants Form 10-K filed with the
Commission on March 29, 2000, and incorporated herein by reference. |
|
(9) |
|
Filed as Exhibit 10.3 to the Registrants Form 10-K filed with the
Commission on March 29, 2000, and incorporated herein by reference. |
|
(10) |
|
Filed as Exhibit 10.29 to the Registrants Form 10-K filed with the
Commission on March 27, 2001, and incorporated herein by reference. |
|
(11) |
|
Filed as Exhibit 2.1 to the Registrants Current Report on Form 8-K
filed with the Commission on July 17, 2000, and incorporated herein
by reference. |
|
(12) |
|
Filed as Exhibit 10.12 to Registrants Form 10-Q filed with the
Commission on May 7, 2001, and incorporated herein by reference. |
|
(13) |
|
Filed as Exhibit 10.32 to Registrants Form 10-Q filed with the
Commission on May 7, 2001, and incorporated herein by reference. |
|
(14) |
|
Filed as Exhibit 10.33 to Registrants Form 10-Q filed with the
Commission on August 14, 2001, and incorporated herein by reference. |
|
(15) |
|
Filed as an Exhibit to Registrants Form 10-K filed with the
Commission on March 15, 2002, and incorporated herein by reference. |
|
(16) |
|
Filed as an Exhibit to Registrants Form 10-Q filed with the
Commission on May 10, 2002, and incorporated herein by reference. |
|
(17) |
|
Filed as an Exhibit to Registrants Form 10-Q filed with the
Commission on November 14, 2002, and incorporated herein by
reference. |
|
(18) |
|
Filed as an Exhibit to Registrants Form 10-K filed with the
Commission on March 24, 2003, and incorporated herein by reference. |
|
(19) |
|
Filed as an Exhibit to Registrants Form 10-Q filed with the
Commission on August 11, 2003, and incorporated herein by reference. |
|
(20) |
|
Filed as an Exhibit to Registrants Form 10-K filed with the
Commission on March 10, 2004, and incorporated herein by reference. |
|
(21) |
|
Filed as an Exhibit to Registrants Proxy Statement for the 2004
annual meeting of shareholders filed with the Commission April 6,
2004. |
|
(22) |
|
Filed as an Exhibit to the Registrants Current Report on Form 8-K
filed with the Commission on March 29, 2004, and incorporated herein
by reference. |
|
(23) |
|
Filed as an Exhibit to Registrants Form 10-Q filed with the
Commission on August 9, 2004, and incorporated herein by reference. |
|
(24) |
|
Filed as an Exhibit to the Registrants Current Report on Form 8-K
filed with the Commission on December 16, 2004, and incorporated
herein by reference. |
|
(25) |
|
Filed as an Exhibit to the Registrants Current Report on Form 8-K
filed with the Commission on January 7, 2005, and incorporated herein
by reference. |
|
(26) |
|
Filed as an Exhibit to the Registrants Current Report on Form 8-K
filed with the Commission on March 8, 2005, and incorporated herein
by reference. |
|
(27) |
|
Filed as an Exhibit to Registrants Form 10-K filed with the
Commission on March 22, 2005, and incorporated herein by reference. |
|
(28) |
|
Filed as an Exhibit to the Registrants Current Report on Form 8-K
filed with the Commission on May 31, 2005, and incorporated herein by
reference. |
|
(29) |
|
Filed as an Exhibit to the Registrants Current Report on Form 8-K
filed with the Commission on July 27, 2005, and incorporated herein
by reference. |
|
(30) |
|
Filed as an Exhibit to the Registrants Current Report on Form 8-K
filed with the Commission on September 19, 2005, and incorporated
herein by reference. |
|
(31) |
|
Filed as an Exhibit to the Registrants Current Report on Form 8-K
filed with the Commission on January 5, 2006, and incorporated herein
by reference. |
44
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Tampa, and State of Florida, on this 14th day of March 2006.
|
|
|
|
|
|
SYKES ENTERPRISES, INCORPORATED
(Registrant)
|
|
|
By: |
/s/ W. Michael Kipphut
|
|
|
|
W. Michael Kipphut, |
|
|
|
Senior Vice President and Chief Financial Officer |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated. Each person whose signature appears below constitutes and appoints W. Michael
Kipphut his true and lawful attorney-in-fact and agent, with full power of substitution and
revocation, for him and in his name, place and stead, in any and all capacities, to sign any and
all amendments to this report and to file the same, with all exhibits thereto, and other documents
in connection therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or should do in person, thereby ratifying and confirming all that
said attorneys-in-fact and agents, or either of them, may lawfully do or cause to be done by virtue
hereof.
|
|
|
|
|
Signature |
|
Title |
|
Date |
/s/ Paul L. Whiting
Paul L. Whiting
|
|
Chairman of the Board
|
|
March 14, 2006 |
|
|
|
|
|
|
|
President and Chief Executive Officer and
|
|
March 14, 2006 |
Charles E. Sykes
|
|
Director (Principal Executive Officer) |
|
|
|
|
|
|
|
/s/ Furman P. Bodenheimer, Jr.
Furman P. Bodenheimer, Jr.
|
|
Director
|
|
March 14, 2006 |
|
|
|
|
|
/s/ Mark C. Bozek
Mark C. Bozek
|
|
Director
|
|
March 14, 2006 |
|
|
|
|
|
/s/ Lt. Gen. Michael P. Delong (Ret.)
Lt. Gen. Michael P. Delong (Ret.)
|
|
Director
|
|
March 14, 2006 |
|
|
|
|
|
/s/ H. Parks Helms
H. Parks Helms
|
|
Director
|
|
March 14, 2006 |
|
|
|
|
|
/s/ Iain Macdonald
Iain Macdonald
|
|
Director
|
|
March 14, 2006 |
|
|
|
|
|
/s/ James S. MacLeod
James S. MacLeod
|
|
Director
|
|
March 14, 2006 |
|
|
|
|
|
/s/ Linda F. McClintock-Greco M.D.
Linda F. McClintock-Greco M.D.
|
|
Director
|
|
March 14, 2006 |
|
|
|
|
|
/s/ William J. Meurer
William J. Meurer
|
|
Director
|
|
March 14, 2006 |
|
|
|
|
|
/s/ James K. Murray, Jr.
James K. Murray, Jr.
|
|
Director
|
|
March 14, 2006 |
45
Table of Contents
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Page No. |
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47 |
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48 |
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49 |
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50 |
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51 |
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52 |
|
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Sykes Enterprises, Incorporated
Tampa, Florida
We have audited the accompanying consolidated balance sheets of Sykes Enterprises, Incorporated and
subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated
statements of operations, changes in shareholders equity, and cash flows for each of the three
years in the period ended December 31, 2005. Our audits also included the financial statement
schedule listed in the Index at Item 15. These financial statements and financial statement
schedule are the responsibility of the Companys management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects,
the financial position of Sykes Enterprises, Incorporated and subsidiaries as of December 31, 2005
and 2004, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2005, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of the Companys internal control over financial reporting
as of December 31, 2005, based on the criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
March 14, 2006 expressed an unqualified opinion on managements assessment of the effectiveness of
the Companys internal control over financial reporting and an unqualified opinion on the
effectiveness of the Companys internal control over financial reporting.
/s/ Deloitte & Touche LLP
Certified Public Accountants
Tampa, Florida
March 14, 2006
47
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
(In thousands, except per share data) |
|
2005 |
|
2004 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
127,612 |
|
|
$ |
93,868 |
|
Receivables, net |
|
|
88,213 |
|
|
|
90,661 |
|
Prepaid expenses and other current assets |
|
|
10,601 |
|
|
|
11,219 |
|
Assets held for sale |
|
|
|
|
|
|
9,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
226,426 |
|
|
|
205,490 |
|
Property and equipment, net |
|
|
72,261 |
|
|
|
82,891 |
|
Goodwill, net |
|
|
5,918 |
|
|
|
5,224 |
|
Intangibles, net |
|
|
2,112 |
|
|
|
|
|
Deferred charges and other assets |
|
|
24,468 |
|
|
|
18,921 |
|
|
|
|
|
|
|
|
|
|
$ |
331,185 |
|
|
$ |
312,526 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
12,990 |
|
|
$ |
13,693 |
|
Accrued employee compensation and benefits |
|
|
31,777 |
|
|
|
30,316 |
|
Deferred grants related to assets held for sale |
|
|
|
|
|
|
6,740 |
|
Income taxes payable |
|
|
2,220 |
|
|
|
2,965 |
|
Deferred revenue |
|
|
25,172 |
|
|
|
22,952 |
|
Other accrued expenses and current liabilities |
|
|
10,274 |
|
|
|
9,386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
82,433 |
|
|
|
86,052 |
|
Deferred grants |
|
|
18,107 |
|
|
|
13,921 |
|
Other long-term liabilities |
|
|
4,555 |
|
|
|
2,518 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
105,095 |
|
|
|
102,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 17) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value, 10,000 shares authorized;
no shares issued and outstanding |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value; 200,000 shares authorized;
44,009 and 43,832 shares issued |
|
|
440 |
|
|
|
438 |
|
Additional paid-in capital |
|
|
165,674 |
|
|
|
163,885 |
|
Retained earnings |
|
|
115,735 |
|
|
|
92,327 |
|
Accumulated other comprehensive income (loss) |
|
|
(3,435 |
) |
|
|
4,871 |
|
|
|
|
|
|
|
|
|
|
|
278,414 |
|
|
|
261,521 |
|
Deferred stock compensation |
|
|
(355 |
) |
|
|
|
|
Treasury stock at cost: 4,712 shares and 4,644 shares |
|
|
(51,969 |
) |
|
|
(51,486 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
226,090 |
|
|
|
210,035 |
|
|
|
|
|
|
|
|
|
|
$ |
331,185 |
|
|
$ |
312,526 |
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
48
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
(In thousands, except per share data) |
|
2005 |
|
2004 |
|
2003 |
|
Revenues |
|
$ |
494,918 |
|
|
$ |
466,713 |
|
|
$ |
480,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Direct salaries and related costs |
|
|
309,604 |
|
|
|
300,600 |
|
|
|
309,489 |
|
General and administrative |
|
|
160,470 |
|
|
|
165,232 |
|
|
|
161,743 |
|
Net gain on disposal of property and equipment |
|
|
(1,778 |
) |
|
|
(6,915 |
) |
|
|
(1,595 |
) |
Net gain on insurance settlement |
|
|
|
|
|
|
(5,378 |
) |
|
|
|
|
Reversal of restructuring and other charges |
|
|
(314 |
) |
|
|
(113 |
) |
|
|
(646 |
) |
Impairment of long-lived assets |
|
|
605 |
|
|
|
690 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
468,587 |
|
|
|
454,116 |
|
|
|
468,991 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
26,331 |
|
|
|
12,597 |
|
|
|
11,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
2,559 |
|
|
|
2,445 |
|
|
|
2,102 |
|
Interest expense |
|
|
(667 |
) |
|
|
(773 |
) |
|
|
(836 |
) |
Income from rental operations, net |
|
|
940 |
|
|
|
151 |
|
|
|
|
|
Other |
|
|
(60 |
) |
|
|
1,441 |
|
|
|
1,322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
2,772 |
|
|
|
3,264 |
|
|
|
2,588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision (benefit) for income taxes |
|
|
29,103 |
|
|
|
15,861 |
|
|
|
13,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (benefit) for income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
7,098 |
|
|
|
4,399 |
|
|
|
5,707 |
|
Deferred |
|
|
(1,403 |
) |
|
|
648 |
|
|
|
(1,056 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes |
|
|
5,695 |
|
|
|
5,047 |
|
|
|
4,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,408 |
|
|
$ |
10,814 |
|
|
$ |
9,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.60 |
|
|
$ |
0.27 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.59 |
|
|
$ |
0.27 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
39,204 |
|
|
|
39,607 |
|
|
|
40,300 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
39,536 |
|
|
|
39,722 |
|
|
|
40,441 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
49
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Deferred |
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Stock |
|
|
Treasury |
|
|
|
|
(In thousands) |
|
Issued |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Compensation |
|
|
Stock |
|
|
Total |
|
|
Balance at January 1, 2003 |
|
|
43,491 |
|
|
$ |
435 |
|
|
$ |
162,117 |
|
|
$ |
72,208 |
|
|
$ |
(11,101 |
) |
|
$ |
|
|
|
$ |
(41,314 |
) |
|
$ |
182,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
280 |
|
|
|
3 |
|
|
|
1,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,169 |
|
Tax benefit of exercise of
stock options |
|
|
|
|
|
|
|
|
|
|
228 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
228 |
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,108 |
) |
|
|
(3,108 |
) |
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,305 |
|
|
|
10,893 |
|
|
|
|
|
|
|
|
|
|
|
20,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 |
|
|
43,771 |
|
|
|
438 |
|
|
|
163,511 |
|
|
|
81,513 |
|
|
|
(208 |
) |
|
|
|
|
|
|
(44,422 |
) |
|
|
200,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
61 |
|
|
|
|
|
|
|
342 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
342 |
|
Tax benefit of exercise of
stock options |
|
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32 |
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,064 |
) |
|
|
(7,064 |
) |
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,814 |
|
|
|
5,079 |
|
|
|
|
|
|
|
|
|
|
|
15,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
43,832 |
|
|
|
438 |
|
|
|
163,885 |
|
|
|
92,327 |
|
|
|
4,871 |
|
|
|
|
|
|
|
(51,486 |
) |
|
|
210,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
166 |
|
|
|
2 |
|
|
|
836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
838 |
|
Deferred stock compensation
for the issuance of restricted
common stock units |
|
|
|
|
|
|
|
|
|
|
854 |
|
|
|
|
|
|
|
|
|
|
|
(854 |
) |
|
|
|
|
|
|
|
|
Amortization of deferred
stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499 |
|
|
|
|
|
|
|
499 |
|
Shares issued under executive
deferred compensation plan
and held in the rabbi trust |
|
|
11 |
|
|
|
|
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(483 |
) |
|
|
(384 |
) |
Comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,408 |
|
|
|
(8,306 |
) |
|
|
|
|
|
|
|
|
|
|
15,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
44,009 |
|
|
$ |
440 |
|
|
$ |
165,674 |
|
|
$ |
115,735 |
|
|
$ |
(3,435 |
) |
|
$ |
(355 |
) | |
$ |
(51,969 |
) |
|
$ |
226,090 |
|
|
|
|
See accompanying notes to Consolidated Financial Statements.
50
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
(In thousands) |
|
2005 |
|
|
2004 |
|
|
2003 |
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
23,408 |
|
|
$ |
10,814 |
|
|
$ |
9,305 |
|
Depreciation and amortization |
|
|
25,943 |
|
|
|
30,237 |
|
|
|
30,125 |
|
Impairment of long-lived assets |
|
|
605 |
|
|
|
690 |
|
|
|
|
|
Reversal of restructuring and other charges |
|
|
(314 |
) |
|
|
(113 |
) |
|
|
(646 |
) |
Stock compensation expense |
|
|
441 |
|
|
|
|
|
|
|
|
|
Deferred income tax (benefit) provision |
|
|
(1,403 |
) |
|
|
648 |
|
|
|
(1,056 |
) |
Tax benefit from stock options |
|
|
|
|
|
|
32 |
|
|
|
228 |
|
Net gain on disposal of property and equipment |
|
|
(1,778 |
) |
|
|
(6,915 |
) |
|
|
(1,595 |
) |
Net gain on insurance settlement |
|
|
|
|
|
|
(5,378 |
) |
|
|
|
|
Termination costs associated with exit activities |
|
|
697 |
|
|
|
1,684 |
|
|
|
|
|
Bad debt expense (reversals) |
|
|
(649 |
) |
|
|
267 |
|
|
|
441 |
|
Foreign exchange gain on liquidation of foreign entity |
|
|
(366 |
) |
|
|
(680 |
) |
|
|
|
|
Unrealized loss on marketable securities |
|
|
(59 |
) |
|
|
|
|
|
|
|
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables |
|
|
(795 |
) |
|
|
(8,699 |
) |
|
|
(2,939 |
) |
Prepaid expenses and other current assets |
|
|
(507 |
) |
|
|
357 |
|
|
|
(875 |
) |
Deferred charges and other assets |
|
|
(2,991 |
) |
|
|
491 |
|
|
|
(1,374 |
) |
Accounts payable |
|
|
(946 |
) |
|
|
(4,797 |
) |
|
|
1,940 |
|
Income taxes receivable/payable |
|
|
(470 |
) |
|
|
1,446 |
|
|
|
9,057 |
|
Accrued employee compensation and benefits |
|
|
2,277 |
|
|
|
(1,698 |
) |
|
|
(5,141 |
) |
Other accrued expenses and current liabilities |
|
|
1,424 |
|
|
|
(1,372 |
) |
|
|
(3,113 |
) |
Deferred revenue |
|
|
2,167 |
|
|
|
(2,931 |
) |
|
|
(136 |
) |
Other long-term liabilities |
|
|
1,485 |
|
|
|
(348 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
48,169 |
|
|
|
13,735 |
|
|
|
34,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(9,910 |
) |
|
|
(25,665 |
) |
|
|
(29,273 |
) |
Cash paid for acquisition of Kelly, Luttmer & Assoc. Ltd, net of cash acquired |
|
|
(3,246 |
) |
|
|
|
|
|
|
|
|
Proceeds from sale of facilities |
|
|
2,480 |
|
|
|
9,663 |
|
|
|
2,411 |
|
Proceeds from sale of property and equipment |
|
|
184 |
|
|
|
99 |
|
|
|
212 |
|
Proceeds from insurance settlement |
|
|
|
|
|
|
6,940 |
|
|
|
|
|
Other |
|
|
(357 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used for investing activities |
|
|
(10,849 |
) |
|
|
(8,963 |
) |
|
|
(26,650 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
Paydowns under revolving line of credit agreements |
|
|
|
|
|
|
|
|
|
|
(1,600 |
) |
Borrowings under revolving line of credit agreements |
|
|
|
|
|
|
|
|
|
|
1,600 |
|
Payments of long-term debt |
|
|
(78 |
) |
|
|
(86 |
) |
|
|
(45 |
) |
Borrowings under long-term debt |
|
|
|
|
|
|
|
|
|
|
71 |
|
Proceeds from issuance of stock |
|
|
838 |
|
|
|
342 |
|
|
|
1,169 |
|
Purchase of treasury stock |
|
|
|
|
|
|
(7,064 |
) |
|
|
(3,108 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used for) financing activities |
|
|
760 |
|
|
|
(6,808 |
) |
|
|
(1,913 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of exchange rates on cash |
|
|
(4,336 |
) |
|
|
3,819 |
|
|
|
6,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
33,744 |
|
|
|
1,783 |
|
|
|
12,605 |
|
CASH AND CASH EQUIVALENTS BEGINNING |
|
|
93,868 |
|
|
|
92,085 |
|
|
|
79,480 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS ENDING |
|
$ |
127,612 |
|
|
$ |
93,868 |
|
|
$ |
92,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
$ |
510 |
|
|
$ |
430 |
|
|
$ |
460 |
|
Cash paid during the year for income taxes |
|
$ |
10,006 |
|
|
$ |
11,216 |
|
|
$ |
9,708 |
|
See accompanying notes to Consolidated Financial Statements.
51
SYKES ENTERPRISES, INCORPORATED AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Sykes Enterprises, Incorporated and consolidated subsidiaries (SYKES or the Company)
provides outsourced customer contact management solutions and services in the business process
outsourcing (BPO) arena to companies, primarily within the communications, technology/consumer,
financial services, healthcare, and transportation and leisure industries. SYKES provides flexible,
high quality outsourced customer contact management services (with an emphasis on inbound technical
support and customer service), which includes customer assistance, healthcare and
roadside assistance, technical support and product sales to its clients customers. Utilizing
SYKES integrated onshore/offshore global delivery model, SYKES provides its services through
multiple communications channels encompassing phone, e-mail, Web and chat. SYKES complements its
outsourced customer contact management services with various enterprise support services in the
United States that encompass services for a companys internal support operations, from technical
staffing services to outsourced corporate help desk services. In Europe, SYKES also provides
fulfillment services including multilingual sales order processing via the Internet and phone,
inventory control, product delivery and product returns handling. The Company has operations in two
geographic regions entitled (1) the Americas, which includes the United States, Canada, Latin
America, India and the Asia Pacific Rim, in which the client base is primarily companies in the
United States that are using the Companys services to support their customer management needs; and
(2) EMEA, which includes Europe, the Middle East, and Africa.
Note 1. Summary of Accounting Policies
Principles of Consolidation The consolidated financial statements include the accounts of
SYKES and its wholly-owned subsidiaries and controlled majority-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires the Company to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
Recognition of Revenue Revenue is recognized pursuant to applicable accounting standards,
including Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 101 (SAB
101), Revenue Recognition in Financial Statements, SAB 104, Revenue Recognition, and the
Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements with Multiple Deliverables.
SAB 101, as amended, and SAB 104 summarize certain of the SEC staffs views in applying generally
accepted accounting principles to revenue recognition in financial statements and provide guidance
on revenue recognition issues in the absence of authoritative literature addressing a specific
arrangement or a specific industry. EITF 00-21 provides further guidance on how to account for
multiple element contracts.
The Company primarily recognizes its revenue from services as those services are performed
under a fully executed contractual agreement and records reductions to revenue for contractual
penalties and holdbacks for failure to meet specified minimum service levels and other performance
based contingencies. Royalty revenue is recognized when a contract has been fully executed, the
product has been delivered or provided, the license fees or rights are fixed and determinable, the
collection of the resulting receivable is probable and there are no other contingencies.
Adjustments to fixed price contracts and estimated losses, if any, are recorded in the period when
such adjustments or losses are known or can be reasonably estimated. Product sales are recognized
upon shipment to the customer and satisfaction of all obligations.
The Company recognizes revenue from software and contractually provided rights in accordance
with the American Institute of Certified Public Accountants (AICPA) Statement of Position 97-2,
Software Revenue Recognition (SOP 97-2), as amended by Statement of Position 98-4, Deferral of
the Effective Date of a Provision of SOP 97-2 (SOP 98-4), Statement of Position 98-9,
Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions (SOP
98-9), SAB 101, SAB 104 and EITF 00-21. Revenue is recognized from licenses of the Companys
software products and rights when the agreement has been executed, the product or right has been
delivered or provided, collectibility is probable and the software license fees or rights are fixed
and determinable. If any portion of the license fees or rights is subject to forfeiture, refund or
other contractual contingencies, the Company defers revenue recognition until these contingencies
have been resolved. SYKES
52
generally accounts for consulting services separate from software license fees for those
multi-element arrangements where consulting services are a separate element and are not essential
to the customers functionality requirements and there is vendor-specific objective evidence of the
fair value of the undelivered elements. Revenue from support and maintenance activities is
recognized ratably over the term of the maintenance period and the unrecognized portion is recorded
as deferred revenue.
Revenue from contracts with multiple-deliverables to include hardware, software, consulting
and other services, or related contracts with the same client, are allocated to separate units of
accounting based on their relative fair value, if the deliverables in the contract(s) meet the
criteria for such treatment. Such criteria include whether a delivered item has value to the
customer on a standalone basis, whether there is objective and reliable evidence of the fair value
of the undelivered items and, if the arrangement includes a general right of return related to a
delivered item, whether delivery of the undelivered item is considered probable and in the
Companys control. Fair value is the price of a deliverable when it is regularly sold on a
standalone basis, which generally consists of vendor-specific objective evidence of fair value. If
there is no evidence of the fair value for a delivered product or service, revenue is allocated
first to the fair value of the undelivered product or service and then the residual revenue is
allocated to the delivered product or service. If there is no evidence of the fair value for an
undelivered product or service, the contract(s) is accounted for as a single unit of accounting,
resulting in delay of revenue recognition for the delivered product or service until the
undelivered product or service portion of the contract is complete. However, in some cases, revenue
may be recognized over the contract period in proportion to the level of service provided on a
systematic and rational basis, using the proportional performance method. Revenue recognition is
limited to the amount that is not contingent upon delivery of any future product or service or
meeting other specified performance conditions.
Cash and Cash Equivalents Cash and cash equivalents consist of cash and highly liquid
short-term investments. Cash in the amount of $124.5 million and $86.7 million at December 31, 2005
and 2004, respectively, was held in interest bearing investments, which have an average maturity of
less than 60 days. Cash and cash equivalents of $86.3 million and $79.0 million at December 31,
2005 and 2004, respectively, were held in international operations and may be subject to additional
taxes if repatriated to the United States.
Allowance for Doubtful Accounts The Company maintains allowances for doubtful accounts of $3.1 million
and $4.3 million as of December 31, 2005 and 2004, or 3.5% and 4.8% of receivables, respectively,
for estimated losses arising from the inability of its customers to make required payments. If the
financial condition of the Companys customers were to deteriorate, resulting in a reduced ability to make
payments, additional allowances may be required which would reduce income from operations. Based on
a review of the accounts receivables balances and activity, the Company reversed $0.6 million of
the allowance for doubtful accounts during 2005.
Property and Equipment Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets. Improvements to
leased premises are amortized over the shorter of the related lease term or the estimated useful
lives of the improvements. Cost and related accumulated depreciation on assets retired or disposed
of are removed from the accounts and any gains or losses resulting therefrom are credited or
charged to income. Depreciation expense was $27.7 million, $32.3 million and $33.0 million for the
years ended December 31, 2005, 2004 and 2003, respectively. Property and equipment includes $0.7
million, $0.1 million and $3.5 million of additions included in accounts payable at December 31,
2005, 2004 and 2003, respectively. Accordingly, non-cash transactions have been excluded from the
accompanying Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and
2003, respectively.
The Company capitalizes certain costs incurred to internally develop software upon the
establishment of technological feasibility. Costs incurred prior to the establishment of
technological feasibility were expensed as incurred. Capitalized internally developed software
costs, net of accumulated amortization, were $1.1 million and $0.7 million at December 31, 2005 and
2004, respectively.
The carrying value of property and equipment, including leased assets, to be held and used is
evaluated for impairment whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable in accordance with Statement of Financial Accounting Standards
(SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An asset is
considered to be impaired when the sum of the undiscounted future net cash flows expected to result
from the use of the asset and its eventual disposition does not exceed its carrying amount. The
amount of the impairment loss, if any, is measured as the amount by which the carrying value of the
asset exceeds its estimated fair value, which is generally determined based on appraisals or sales
prices of comparable assets. Occasionally, the Company redeploys property and equipment from
under-utilized
53
centers to other locations to improve capacity utilization if it is determined that the related
undiscounted future cash flows in the under-utilized centers would not be sufficient to recover the
carrying amount of these assets. As of December 31, 2005, the Company determined that its property
and equipment was not impaired, including the idle facility in Perry County, Kentucky (as discussed
below) which is being held and used for future use in the Companys operations and increased demand for
services.
In September 2005, the Company withdrew its plans to sell the Perry, Kentucky facility due to
increased demand for customer care management services from new and existing clients in the United
States. As a result, the net carrying value of $4.5 million of land, building and equipment related
to this site was reclassified from Assets held for sale to Property and Equipment as of
September 30, 2005. The net carrying value of $4.5 million was offset by a related deferred grant
in the amount of $1.9 million as of September 30, 2005. The Company also recaptured the related
depreciation, net of grant amortization of $0.7 million in September 2005. In connection with the
decision to reopen the Perry, Kentucky facility, certain assets held for sale at this facility,
which were not redeployed to other locations, were deemed impaired, written down to fair value and
subsequently sold resulting in an impairment charge of $0.5 million in September 2005. The Perry
facility remains idle as of December 31, 2005.
In 2005, in connection with the plan of migration of the call volumes of the customer contact
management services and related operations from the Companys Bangalore, India facility, a
component of the Americas segment, to other facilities as discussed in Note 14, the Company
redeployed property and equipment located in India totaling approximately $1.8 million and recorded
an asset impairment charge of $0.7 million for certain property and equipment in India as of
December 31, 2004. Upon completion of the redeployment of the property and equipment from the India
facility, the Company recorded an additional asset impairment charge of $0.1 million in September
2005.
Rent Expense The Company has entered into several operating lease agreements, some of which
contain provisions for future rent increases, rent free periods, or periods in which rent payments
are reduced. The total amount of the rental payments due over the lease term is being charged to
rent expense on the straight-line method over the term of the lease in accordance with SFAS No. 13
Accounting for Leases, FASB Technical Bulletin 88-1 Issues Relating to Accounting for Leases,
and FASB Technical Bulletin 85-3 Accounting for Operating Leases with Scheduled Rent Increases.
The difference between rent expense recorded and the amount paid is credited or charged to Accrued
rent which is included in Other accrued expenses and current liabilities in the accompanying
Consolidated Balance Sheets.
Investment in SHPS The Company holds a 6.5% ownership interest in SHPS, Incorporated, which
is accounted for at cost of approximately $2.1 million as of December 31, 2005 and 2004 and is
included in Deferred charges and other assets in the accompanying Consolidated Balance Sheets.
(See Note 8.) The Company will record an impairment charge or loss if it believes the investment
has experienced a decline in value that is other than temporary. Future adverse changes in market
conditions or poor operating results of the underlying investment could result in losses or an
inability to recover the carrying value of the investment and, therefore, might require an
impairment charge in the future.
Investments Held in Rabbi Trust Securities held in a rabbi trust for a supplemental
nonqualified executive retirement program, as more fully described in Note 18, Employee Benefit
Plans, include the fair market value of investments in various mutual funds and shares of the
Companys common stock. The fair market value of these investments is determined by quoted market
prices and is adjusted to the current market price at the end of each reporting period. The
investments held in mutual funds, classified as trading securities, had a fair market value of
approximately $0.7 million at December 31, 2005 and are included in Deferred charges and other
assets in the accompanying Consolidated Balance Sheets. These investments were comprised of 55%
equity securities and 45% debt securities at December 31, 2005. During the year ended December 31,
2005, the Company recorded approximately $0.1 million in unrealized gains from holding these
investments, which is included in Other income (expense) in the accompanying Consolidated
Statements of Operations.
The investments held in the Companys common stock had a fair market value of approximately
$0.5 million at December 31, 2005 and are included in Treasury Stock in the accompanying
Consolidated Balance Sheets. During the year ended December 31, 2005, the Company recorded
approximately $0.2 million in compensation expense associated with these investments, which is included in
General and administrative in the accompanying Consolidated Statements of Operations.
Goodwill On January 1, 2002, the Company adopted SFAS No. 142 (SFAS 142), Goodwill and
Other
54
Intangible Assets. According to this statement, goodwill and other intangible assets with
indefinite lives are no longer subject to amortization, but instead must be reviewed at least
annually, and more frequently in the presence of certain circumstances, for impairment by applying
a fair value based test. Fair value for goodwill is based on discounted cash flows, market
multiples and/or appraised values as appropriate. Under SFAS 142, the carrying value of assets is
calculated at the lowest levels for which there are identifiable cash flows (the reporting unit).
If the fair value of the reporting unit is less than its carrying value, an impairment loss is
recorded to the extent that the fair value of the goodwill within the reporting unit is less than
its carrying value. Based on the results of the Companys annual impairment reviews in the third
quarter of each year in accordance with SFAS 142, the Company determined that there has been no
impairment of goodwill. The Company expects to receive future benefits from previously acquired
goodwill over an indefinite period of time.
Intangible Assets Intangible assets, primarily customer relationships, existing technologies
and covenants not to compete, are amortized using the straight-line method over their estimated
period of benefit, generally ranging from two to fifteen years. The Company periodically evaluates
the recoverability of intangible assets and takes into account events or changes in circumstances
that warrant revised estimates of useful lives or that indicate that an impairment exists. In
connection with a 2005 acquisition in Canada, as discussed in Note 2 Acquisitions and Dispositions,
the Company recorded intangible assets of $2.4 million. The related amortization expense in 2005
was $0.3 million. As of December 31, 2004 and 2003, intangible assets were fully amortized and had
a carrying value of zero.
Income Taxes The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes. Deferred income tax assets and liabilities are provided to reflect tax consequences
of differences between the tax bases of assets and liabilities and their reported amounts in the
accompanying Consolidated Financial Statements.
Self-Insurance Programs The Company self-insures for certain levels of workers
compensation, and as of December 31, 2004, also self-insured for employee health insurance.
Estimated costs of these self-insurance programs are accrued at the projected settlements for known
and anticipated claims. Self-insurance liabilities of the Company amounted to $1.6 million and $1.7
million at December 31, 2005 and 2004, respectively.
Deferred Grants Recognition of income associated with grants of land and the acquisition of
property, buildings and equipment is deferred until after the completion and occupancy of the
building and title has passed to the Company, and the funds have been released from escrow. The
deferred amounts for both land and building are amortized and recognized as a reduction of
depreciation expense included within general and administrative costs over the corresponding useful
lives of the related assets. Amounts received in excess of the cost of the building are allocated
to the cost of equipment and, only after the grants are released from escrow, recognized as a
reduction of depreciation expense over the weighted average useful life of the related equipment,
which approximates five years. Amortization of the deferred grants that is included as a reduction to General
and administrative costs in the accompanying Consolidated Statements of Operations was
approximately $2.0 million, $2.1 million and $2.9 million for the years ended December 31, 2005,
2004 and 2003, respectively.
Deferred Revenue The Company invoices certain contracts in advance. The deferred revenue is
earned over the service periods of the respective contracts, which range from six months to seven
years. Deferred revenue included in current liabilities in the accompanying Consolidated Balance
Sheets includes the up-front fees associated with services to be provided over the next ensuing
twelve month period and the up-front fees associated with services to be provided over multiple
years in connection with contracts that contain cancellation and refund provisions, whereby the
manufacturers or customers can terminate the contracts and demand pro-rata refunds of the up-front
fees with short notice. Deferred revenue included in current liabilities in the accompanying
Consolidated Balance Sheets also includes estimated penalties and holdbacks of approximately $0.9
million and $0.3 million as of December 31, 2005 and 2004, respectively, for failure to meet
specified minimum service levels in certain contracts and other performance based contingencies.
Stock-Based Compensation The Company has adopted the disclosure only provisions of SFAS No.
123 (SFAS 123), Accounting for Stock-Based Compensation. Under SFAS 123, companies have the
option to measure compensation costs for stock options using the intrinsic value method prescribed
by Accounting Principles Board Opinion (APB) No. 25 (APB 25), Accounting for Stock Issued to
Employees (APB 25). Under APB 25, compensation expense is generally not recognized when both the
exercise price is the same as the market price and the number of shares to be issued is set on the
date the employee stock option is granted. Since employee stock options are granted on this basis
and the Company has chosen to use the intrinsic value method, no compensation expense is recognized
for stock option grants.
55
If the Company had elected to recognize compensation expense for the issuance of options to
employees of the Company based on the fair value method of accounting prescribed by SFAS 123, net
income and earnings per share would have been reduced to the pro forma amounts as follows (in
thousands except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
Net Income: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income as reported |
|
$ |
23,408 |
|
|
$ |
10,814 |
|
|
$ |
9,305 |
|
Add: Stock-based compensation included in reported
net income, net of tax |
|
|
441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add (Deduct): |
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation under the fair value method,
net of tax |
|
|
(1,090 |
) |
|
|
(404 |
) |
|
|
(1,887 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
22,759 |
|
|
$ |
10,410 |
|
|
$ |
7,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic, as reported |
|
$ |
0.60 |
|
|
$ |
0.27 |
|
|
$ |
0.23 |
|
Basic, pro forma |
|
$ |
0.58 |
|
|
$ |
0.26 |
|
|
$ |
0.18 |
|
Diluted, as reported |
|
$ |
0.59 |
|
|
$ |
0.27 |
|
|
$ |
0.23 |
|
Diluted, pro forma |
|
$ |
0.58 |
|
|
$ |
0.26 |
|
|
$ |
0.18 |
|
The pro forma amounts were determined using the Black-Scholes valuation model with the
following key assumptions: (i) a discount rate of 2.0% for 2003 (no options were issued in 2004 and
2005); (ii) a volatility factor of 83.91% for 2003 based upon the average trading price of the
Companys common stock since it began trading on the NASDAQ National Market; (iii) no dividend
yield; and (iv) an average expected option life of three years in 2003 (three years for the
Employee Stock Purchase Plan). In addition, the pro forma amount for 2004 and 2003 includes
approximately $0.1 million and $0.1 million, respectively, related to purchase discounts offered
under the Employee Stock Purchase Plan.
On February 1, 2005, the Compensation Committee of the Board of Directors approved
accelerating the vesting of most out-of-the-money, unvested stock options held by current
employees, including executive officers and certain employee directors. An option was considered
out-of-the-money if the stated option exercise price was greater than the closing price, $7.23, of
the Companys common stock on the day the Compensation Committee approved the acceleration. The
Compensation Committee also approved accelerating the vesting of out-of the-money, unvested stock
options held by non-employee directors, subject to shareholder approval at the May 2005 Annual
Shareholders Meeting.
The following table summarizes the options accelerated on February 1, 2005:
|
|
|
|
|
|
|
|
|
|
|
Aggregate Number of |
|
|
Weighted Average |
|
|
|
Shares Issuable Under |
|
|
Exercise Price Per |
|
|
|
Accelerated Options |
|
|
Share |
|
Certain Directors & Executive Officers: |
|
|
|
|
|
|
|
|
Jenna R. Nelson |
|
|
16,500 |
|
|
$ |
8.640 |
|
William N. Rocktoff |
|
|
29,500 |
|
|
$ |
9.050 |
|
Charles E. Sykes (employee director) |
|
|
11,000 |
|
|
$ |
9.090 |
|
|
|
|
|
|
|
|
|
|
Total Certain Directors & Executive Officers |
|
|
57,000 |
|
|
$ |
8.939 |
|
|
|
|
|
|
|
|
|
|
Total Non-officer Employees |
|
|
68,550 |
|
|
$ |
9.814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
125,550 |
|
|
$ |
9.416 |
|
|
|
|
|
|
|
|
|
56
At the Annual Meeting on May 24, 2005, the shareholders approved accelerating the vesting of
the out-of-the-money, unvested stock options held by the non-employee directors, as previously
approved by the Compensation Committee. Options held by non-employee directors were considered
out-of-the-money if the stated option exercise price was greater than the closing price, $8.39, of
the Companys common stock on May 24, 2005. As a result, the Company accelerated the vesting of
8,332 unvested stock options held by Paul L. Whiting at an exercise price of $8.732 on May 24,
2005. There was no additional compensation expense recognized in 2005, or in the amounts in the pro
forma stock-based compensation table presented within this note, as a result of accelerating the
vesting of the stock options on February 1, 2005 and May 24, 2005.
The decision to accelerate vesting of these options and eliminate future compensation expense
was based on a review of the Companys long-term incentive programs in light of current market
conditions and changing accounting rules regarding stock option expensing that the Company must
follow beginning January 1, 2006. This accounting rule, entitled Statement of Financial Accounting
Standards No. 123 (Revised 2004), Share-Based Payment (SFAS 123R), requires that compensation cost
related to share-based payment transactions, including stock options, be recognized in the
financial statements. Excluding holders of foreign stock options that elected to decline the
accelerated vesting, it is estimated that the maximum future compensation expense that would have
been charged to earnings, absent the acceleration of these options, based on the Companys
implementation date for SFAS 123R as of January 1, 2006, was less than $0.1 million.
In accordance with APB 25, as discussed in Note 19, Stock Options and Common Stock Units, the
Company applies variable plan accounting for grants of common stock units issued under the 2004
Non-Employee Director Fee Plan and recognizes compensation cost over the vesting period.
Fair Value of Financial Instruments The following methods and assumptions were used to
estimate the fair value of each class of financial instruments for which it is practicable to
estimate that value:
|
|
|
Cash, Accounts Receivable, Marketable Securities and Accounts Payable. The carrying
amounts reported in the balance sheet for cash, accounts receivable, marketable securities
and accounts payable approximates their fair values. |
|
|
|
|
Long-Term Debt. The fair value of the Companys long-term debt, including the current
portion thereof, is estimated based on the quoted market price for the same or similar
types of borrowing arrangements. The carrying value of the Companys long-term debt
approximates fair value. As of December 31, 2005 and 2004, the Company had no outstanding
long-term debt. |
Foreign Currency Translation The assets and liabilities of the Companys foreign
subsidiaries, whose functional currency is other than the U.S. Dollar, are translated at the
exchange rates in effect on the reporting date, and income and expenses are translated at the
weighted average exchange rate during the period. The net effect of translation gains and losses is
not included in determining net income, but is included in Accumulated Other Comprehensive Income
(Loss), which is reflected as a separate component of shareholders equity until the sale or until
the complete or substantially complete liquidation of the net investment in the foreign subsidiary.
Foreign currency transactional gains and losses are included in determining net income. Such gains
and losses are included in other income (expense) in the accompanying Consolidated Statements of
Operations.
Foreign Currency and Derivative Instruments Periodically, the Company
enters into foreign currency contracts with financial institutions to protect against currency
exchange risks associated with existing assets and liabilities denominated in a foreign currency.
These contracts require the Company to exchange currencies in the future at rates agreed upon at
the contracts inception. The contracts entered into by the Company have been primarily related to
the Euro. A foreign currency contract acts as an economic hedge as the gains and losses on these
contracts typically offset or partially offset gains and losses on the assets, liabilities, and
transactions being hedged. The Company does not designate its foreign currency contracts as
accounting hedges and does not hold or issue financial instruments for speculative or trading
purposes. Foreign currency contracts are accounted for on a mark-to-market basis, with unrealized
gains or losses recognized as a component of income in the current period.
Unrealized and realized gains or losses related to these contracts for the three years ended
December 31, 2005 were immaterial.
Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS 123R, Share-Based Payment which revises SFAS 123 and supersedes APB 25 and
amends SFAS No. 95, Statement of Cash Flows. SFAS 123R requires companies to recognize in their
income statement the grant-date fair value of stock options and other equity-based compensation
issued to employees and
57
directors. The Company adopted SFAS 123R on January 1, 2006. The standard requires that
compensation expense for most equity-based awards be recognized over the requisite service period,
usually the vesting period, while compensation expense for liability-based awards (those usually
settled in cash rather than stock) be re-measured to fair-value at each balance sheet date until
the award is settled. Under SFAS 123R, the pro forma disclosures previously permitted will no
longer be an alternative to financial statement recognition. The adoption of SFAS 123R is not
expected to have a material effect on the financial condition, results of operations, or cash flows
of the Company as most outstanding options were fully vested as of December 31, 2005.
The Company uses the Black-Scholes formula to estimate the value of stock-based compensation
granted to employees and directors and expects to continue to use this option valuation model in
2006, but may consider switching to another model in the future, if the Company determines that
such model will produce a better estimate of fair value. Because SFAS 123R must be applied not only
to new awards, but to previously granted awards that are not fully vested on January 1, 2006, the
effective date of SFAS 123R, compensation cost for some previously granted options will be
recognized under SFAS 123R. However, had the Company adopted SFAS 123R in prior periods, the impact
of this standard would have approximated the impact described above in the disclosure of pro forma net
income and net income per share in this Note 1.
SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation
cost to be reported as a financing cash flow, rather than as an operating cash flow as previously
required.
The Company will use the modified prospective method, which requires it to record compensation
expense for the non-vested portion of previously issued awards that remain outstanding at the
initial date of adoption and to record compensation expense for any awards issued or modified after
January 1, 2006.
In March 2005, the SEC issued SAB 107 (SAB 107), Share-Based Payments, which provides
guidance on valuation methods available and guidance on other related matters in applying the
provisions of SFAS 123R. The Company adopted the provisions of SAB 107 in conjunction with the
adoption of SFAS 123R on January 1, 2006.
In October 2005, the FASB issued FASB Staff Position FAS No. 123R-2 (SFAS 123R-2), Practical
Accommodation to the Application of Grant Date as Defined in FAS 123R. SFAS 123R-2 provides
guidance on the application of grant date as defined in SFAS 123R. In accordance with this
standard, a grant date of an award exists if a) the award is a unilateral grant and b) the key
terms and conditions of the award are expected to be communicated to an individual recipient within
a relatively short time period from the date of approval. The Company adopted SFAS 123R-2 in
conjunction with the adoption of SFAS 123R on January 1, 2006.
In November 2005, the FASB issued FASB Staff Position FAS No. 123R-3 (SFAS 123R-3),
Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards.
SFAS 123R-3 provides an elective alternative method that establishes a computational component to
arrive at the beginning balance of the accumulated paid-in capital pool related to employee
compensation and a simplified method to determine the subsequent impact on the accumulated paid-in
capital pool of employee awards that are fully vested and outstanding upon the adoption of SFAS
123R on January 1, 2006. The Company is currently evaluating the use of this
transition method.
In March 2004, the EITF reached a consensus on Issue No. 03-1 (EITF 03-1), The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 provides
guidance on other-than-temporary impairment evaluations for securities accounted for under SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities, and SFAS No. 124,
"Accounting for Certain Investments Held by Not-for-Profit Organizations, and non-marketable
equity securities accounted for under the cost method. The EITF developed a basic three-step test
to evaluate whether an investment is other-than-temporarily impaired. In September 2004, the FASB
delayed the effective date of the recognition and measurement provisions of EITF 03-1. However, the
disclosure provisions were effective for fiscal years ending after June 15, 2004. In November 2005,
the FASB issued final FASB Staff Position Nos. SFAS 115-1 and SFAS 124-1 (SFAS 115-1 and 124-1)
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments which
superseded EITF 03-1 and provided similar guidance. FASB Staff Position Nos. SFAS 115-1 and SFAS
124-1 are effective for fiscal years beginning after December 15, 2005. The adoption of the
recognition and measurement provisions of these standards is not expected to have a material impact
on the financial condition, results of operations or cash flows of the Company.
58
In June 2004, the EITF reached a consensus on Issue No. 02-14 (EITF 02-14), Whether an
Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock. EITF
02-14 addresses whether the equity method of accounting should be applied to investments when an
investor does not have an investment in voting common stock of an investee but exercises
significant influence through other means. EITF 02-14 states that an investor should only apply the
equity method of accounting when it has investments in either common stock or in-substance common
stock of a corporation, provided that the investor has the ability to exercise significant
influence over the operating and financial policies of the investee. The Company adopted EITF
02-14 on January 1, 2005. The impact of this adoption did not have a material effect on the
financial condition, results of operations or cash flows of the Company.
In December 2004, the FASB issued Staff Position 109-1 (SFAS 109-1), Application of
FASB Statement 109, Accounting for Income Taxes , to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004. The Act, which was signed into law
in October 2004, provides a tax deduction on qualified domestic production activities. When fully
phased-in, the deduction will be up to 9% of the lesser of qualified production activities income
or taxable income. Based on the guidance provided by SFAS 109-1, this deduction should be accounted
for as a special deduction under SFAS 109 and will reduce tax expense in the period or periods that
the amounts are deductible on the tax return. The tax benefit resulting from the new deduction was
effective for 2005. The adoption of these new tax provisions did not have a material impact on the
financial condition, results of operations or cash flows of the Company.
In December 2004, the FASB issued FASB Staff Position No. SFAS 109-2 (SFAS 109-2), Accounting
and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs
Creations Act of 2004. The Act introduced a limited time 85% dividends received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer (repatriation provision), provided
certain criteria are met. SFAS 109-2 provides accounting and disclosure guidance for the
repatriation provision. Based on a cost-benefit analysis, the Company decided not to repatriate any
foreign income under the Act.
In March 2005, the FASB issued Interpretation No. 47 (FIN 47), Accounting for Conditional
Asset Retirement Obligations that requires an entity to recognize a liability for a conditional
asset retirement obligation when incurred if the liability can be reasonably estimated. FIN 47
clarifies that the term conditional asset retirement obligation refers to a legal obligation to
perform an asset retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the entity. FIN 47 also
clarifies when an entity would have sufficient information to reasonably estimate the fair value of
an asset retirement obligation. FIN 47 is effective no later than the end of fiscal years ending
after December 15, 2005. The impact of this adoption did not have a material effect on the
financial condition, results of operations or cash flows of the Company.
In May 2005, the FASB issued SFAS No. 154 (SFAS 154), Accounting Changes and Error
Corrections, which requires retrospective application to prior periods financial statements for
changes in accounting principle and redefines the term restatement as the revising of previously
issued financial statements to reflect the correction of an error. Under retrospective application,
the new accounting principle is applied as of the beginning of the first period presented as if
that principle had always been used. The cumulative effect of the change is reflected in the
carrying value of assets and liabilities as of the first period presented and the offsetting
adjustments are recorded to opening retained earnings. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December 15, 2005.
In July 2005, the FASB issued an exposure draft of a proposed interpretation of SFAS No. 109,
Accounting for Income Taxes entitled Accounting for Uncertain Tax Positions. The proposed
interpretation stipulates that the benefit from a tax position should be recorded only when it is
probable that the tax position will be sustained upon audit by taxing authorities, based solely on
the technical merits of the tax position. The final issuance of this proposed interpretation, which
may be subject to significant changes, will be no earlier than the first quarter of 2006 and the
effective date has not been determined. The Company is currently evaluating the impact of this
proposed standard on its financial position, results of operations and cash flows.
Note 2. Acquisitions and Dispositions
On September 30, 2003, the Company sold the land and building related to its Scottsbluff,
Nebraska facility, which was closed in connection with the 2002 restructuring plan, for $2.0
million cash, resulting in a net gain of $1.9 million. The net book value of the facilities of $1.9
million was offset by the related deferred grants of $1.8 million. The net gain on the sale of the
Scottsbluff facility of $1.9 million is included in Net gain on disposal of property and
equipment in the accompanying 2003 Consolidated Statement of Operations.
59
On December 31, 2003, the Company sold the land and building related to its Eveleth, Minnesota
facility for $2.3 million, for which the Company received $0.3 million cash and a $2.0 million note
receivable, resulting in a net gain of $1.7 million recognized over the term of the note using the
installment sales method of accounting. The net book value of the facilities of $3.5 million was
offset by the related deferred grants of $2.9 million. The Company recognized $0.2 million of the
$1.7 million net gain on the sale of the Eveleth facility in 2003, which is included in Net gain
on disposal of property and equipment in the accompanying 2003 Consolidated Statement of
Operations. The remaining $1.5 million net gain was recognized in 2004 when the note receivable
balance was paid in full and is included in Net gain on disposal of property and equipment in the
accompanying 2004 Consolidated Statement of Operations.
On January 15, 2004, the Company sold the land, building and its contents related to its
Klamath Falls, Oregon facility for $4.0 million in cash, resulting in a net gain of $2.7 million in
the first quarter of 2004. The net book value of the facilities of $2.3 million was offset by the
related deferred grants of $1.0 million. On March 31, 2004, the Company sold a parcel of land at
its Pikeville, Kentucky facility for $0.2 million in cash, resulting in a net gain of $0.1 million
in the first quarter of 2004. On July 9, 2004, the Company sold the land, building and its contents
related to its Hays, Kansas facility for $3.0 million cash, resulting in a net gain of $2.8 million
in the third quarter of 2004. The net book value of the facilities of $1.5 million was offset by
the related deferred grants of $1.3 million.
Accordingly, the net gains on the sale of these facilities of $7.1 million
related to the Eveleth, Klamath Falls, Pikeville and Hays facilities are included in Net gain on
disposal of property and equipment in the accompanying 2004 Consolidated Statement of Operations.
In April 2004, related to the Companys efforts to realign the EMEA cost structure with
current business levels, the Company proposed a liquidation plan to close its operations in Turkey.
Accordingly, the Company transferred one remaining contract to other SYKES subsidiaries and
shutdown the operations. In May 2004, the Company substantially completed the liquidation of its
net investment in Turkey. As a result, the net effect of the translation gains and losses of $0.7
million was recognized as a gain on liquidation of a foreign entity and included in Other income
in the accompanying 2004 Consolidated Statement of Operations. Due to the immaterial amounts, the
financial data related to the Companys net investment in Turkey has not been classified as
discontinued operations.
The Company reported net income or net loss from Turkeys operations, excluding the $0.7
million previously mentioned foreign translation gain, of $0.3 million net loss for 2004 and
breakeven for 2003. Turkeys net assets included in the accompanying Consolidated Balance Sheet as
of December 31, 2004 were $0.2 million .
On March 1, 2005, the Company purchased the shares of Kelly, Luttmer & Associates Limited
(KLA) located in Calgary, Alberta, Canada, which included net assets of approximately $0.2
million. KLA specializes in providing call center services for organizational health, employee
assistance, occupational health, and disability management. The Company acquired these operations
in an effort to broaden its operations in the healthcare sector. Total cash consideration paid was
approximately $3.2 million based on foreign currency rates in effect at the date of the
acquisition. Based on a third-party valuation, the purchase price resulted in a purchase price
allocation to net assets of $0.2 million, to purchased intangible assets of $2.4 million (primarily
customer relationships) and to goodwill of $0.6 million. The purchased intangible assets (other
than goodwill) are amortized over a range of two to fifteen years, resulting in amortization
expense of $0.3 million for the year ended December 31, 2005 which is included in General and
administrative costs in the accompanying Consolidated Statements of Operations. The following
table presents the purchased intangible assets at December 31, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
Net |
|
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
Contractual agreements |
|
$ |
2,432 |
|
|
$ |
320 |
|
|
$ |
2,112 |
|
|
|
|
|
|
|
|
|
|
|
Estimated future amortization expense for the five succeeding years is as follows (in thousands):
|
|
|
|
|
Year Ending December 31, |
|
Amount |
|
2006 |
|
$ |
384 |
|
2007 |
|
$ |
258 |
|
2008 |
|
$ |
130 |
|
2009 |
|
$ |
126 |
|
2010 |
|
$ |
126 |
|
60
Pro-forma results of operations, in respect to this acquisition, have not been presented
because the effect of this acquisition was not material.
On April 1, 2005, the Company sold the land and building related to its Greeley, Colorado
facility for $2.4 million cash, resulting in a net gain of $1.7 million. The net book value of the
facilities of $1.4 million was offset by the related deferred grants of $0.7 million.
Note 3. Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk
consist principally of trade receivables. The Companys credit concentrations are limited due to
the wide variety of customers and markets in which the Companys services are sold, with the
exception of two major customers as discussed in Note 20, Segments and Geographic Information.
Note 4. Receivables
Receivables consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
2004 |
|
Trade accounts receivable |
|
$ |
86,638 |
|
|
$ |
89,950 |
|
Income taxes receivable |
|
|
2,849 |
|
|
|
3,255 |
|
Other |
|
|
1,777 |
|
|
|
1,749 |
|
|
|
|
|
|
|
|
|
|
|
91,264 |
|
|
|
94,954 |
|
|
|
|
|
|
|
|
|
|
Less allowance for doubtful accounts |
|
|
3,051 |
|
|
|
4,293 |
|
|
|
|
|
|
|
|
|
|
$ |
88,213 |
|
|
$ |
90,661 |
|
|
|
|
|
|
|
|
Note 5. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
2004 |
|
Deferred tax asset (Note 13) |
|
$ |
3,263 |
|
|
$ |
4,419 |
|
Prepaid maintenance |
|
|
1,527 |
|
|
|
2,080 |
|
Inventory, at cost |
|
|
1,093 |
|
|
|
1,334 |
|
Prepaid rent |
|
|
1,178 |
|
|
|
1,086 |
|
Prepaid insurance |
|
|
1,487 |
|
|
|
560 |
|
Restricted cash |
|
|
369 |
|
|
|
|
|
Prepaid telephone |
|
|
29 |
|
|
|
499 |
|
Prepaid other |
|
|
1,655 |
|
|
|
1,241 |
|
|
|
|
|
|
|
|
|
|
$ |
10,601 |
|
|
$ |
11,219 |
|
|
|
|
|
|
|
|
Note 6. Assets Held for Sale
In 2004, assets held for sale at four customer contact management centers in the United States
consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
2004 |
|
Land |
|
$ |
|
|
|
$ |
1,352 |
|
Buildings and leasehold improvements |
|
|
|
|
|
|
9,124 |
|
Equipment, furniture and fixtures |
|
|
|
|
|
|
7,931 |
|
Capitalized software development costs |
|
|
|
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,521 |
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation |
|
|
|
|
|
|
8,779 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
9,742 |
|
|
|
|
|
|
|
|
61
Related to these assets are deferred grants of $6.7 million as of December 31, 2004, which are
included in Deferred grants related to assets held for sale in the accompanying Consolidated
Balance Sheets. As discussed in Note 7, in 2005 the Company sold, leased or placed in use the four
customer contact management centers and reclassified the assets to Property and Equipment from
Assets Held for Sale.
Note 7. Property and Equipment
Property and equipment, including properties leased to others, consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
2004 |
|
Land |
|
$ |
3,795 |
|
|
$ |
2,578 |
|
Buildings and leasehold improvements |
|
|
50,119 |
|
|
|
48,872 |
|
Equipment, furniture and fixtures |
|
|
162,673 |
|
|
|
173,281 |
|
Capitalized software development costs |
|
|
4,778 |
|
|
|
9,442 |
|
Transportation equipment |
|
|
392 |
|
|
|
464 |
|
Construction in progress |
|
|
773 |
|
|
|
1,749 |
|
|
|
|
|
|
|
|
|
|
|
222,530 |
|
|
|
236,386 |
|
Less accumulated depreciation |
|
|
150,269 |
|
|
|
153,495 |
|
|
|
|
|
|
|
|
|
|
$ |
72,261 |
|
|
$ |
82,891 |
|
|
|
|
|
|
|
|
In September 2004, the building and contents of the customer contact management center located
in Marianna, Florida was severely damaged by Hurricane Ivan. After settlement with the insurer in
December 2004, the Company recognized a net gain of $5.4 million after write-off of the property
and equipment, which had a net book value of $3.4 million, net of the related deferred grants of
$2.2 million. The Company also received an insurance recovery for business interruption during 2004
and recognized $0.1 million and $0.2 million, respectively, as a reduction to Direct salaries and
related costs and General and administrative costs in the accompanying Consolidated Statement of
Operations for the year ended December 31, 2004. In December 2004, the Company reached an agreement
with the City of Marianna to donate the underlying land to the city with $0.1 million in cash to
assist with the site demolition and clean up of the property with no further obligation of the
Company.
In April 2005, the Company leased the land, building and its contents related to its Palatka,
Florida facility to an unrelated third party effective May 1, 2005 for a period of 5 years
cancelable by the lessee at the end of the third or fourth years at varying penalties not exceeding
one years rent. This operating lease is renewable, at the tenants option, for five additional
periods of two years each.
In June 2005, the Company leased the land, building and its contents related to its Ada,
Oklahoma facility under an operating lease to an unrelated third party effective November 1, 2005
for a noncancelable period of 5 years renewable, at the tenants option, for three additional
periods of three years each.
The Company has also leased properties to unrelated third parties in Manhattan, Kansas and
Pikeville, Kentucky. The Manhattan, Kansas operating lease commenced August 2004, is for a period
of five years and may be canceled by the lessee at the end of the fourth year by paying a penalty
equivalent to three months rent. The lease is renewable, at the tenants option, for five
additional periods of two years each. The Pikeville, Kentucky operating lease commenced February
2005, is for a period of one year and is renewable for five additional periods of two years each.
As of December 31, 2005, the leased properties in Ada, Manhattan, Pikeville and Palatka
consist of the following (in thousands):
|
|
|
|
|
|
|
Amount |
|
Land, building and improvements |
|
$ |
10,460 |
|
Equipment, furniture and fixtures |
|
|
6,875 |
|
|
|
|
|
|
|
|
17,335 |
|
Less accumulated depreciation |
|
|
9,678 |
|
|
|
|
|
|
|
$ |
7,657 |
|
|
|
|
|
Deferred grants, net |
|
$ |
(6,766 |
) |
|
|
|
|
62
Some of these operating lease agreements for properties leased to others contain provisions
for future rent increases. Accordingly, the total amount of the rental payments due over the lease
term is recognized as rental income on the straight-line method over the term of the lease in
accordance with SFAS No. 13 Accounting for Leases. Future minimum rental payments, including
penalties for failure to renew, to be received on non-cancelable operating leases are contractually
due as follows as of December 31, 2005 (in thousands):
|
|
|
|
|
|
|
Amount |
|
2006 |
|
$ |
1,839 |
|
2007 |
|
|
1,097 |
|
2008 |
|
|
1,352 |
|
2009 |
|
|
519 |
|
2010 |
|
|
448 |
|
Thereafter |
|
|
|
|
|
|
|
|
|
|
$ |
5,255 |
|
|
|
|
|
Note 8. Deferred Charges and Other Assets
Deferred charges and other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
2004 |
|
Non-current deferred tax asset (see Note 13) |
|
$ |
16,624 |
|
|
$ |
14,225 |
|
Investment in SHPS, Incorporated, at cost |
|
|
2,089 |
|
|
|
2,089 |
|
Non-current value added tax receivable |
|
|
2,167 |
|
|
|
470 |
|
Other |
|
|
3,588 |
|
|
|
2,137 |
|
|
|
|
|
|
|
|
|
|
$ |
24,468 |
|
|
$ |
18,921 |
|
|
|
|
|
|
|
|
Note 9. Accrued Employee Compensation and Benefits
Accrued employee compensation and benefits consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
2004 |
|
Accrued compensation |
|
$ |
16,418 |
|
|
$ |
14,582 |
|
Accrued vacation |
|
|
6,249 |
|
|
|
6,754 |
|
Accrued employment taxes |
|
|
5,810 |
|
|
|
5,498 |
|
Other |
|
|
3,300 |
|
|
|
3,482 |
|
|
|
|
|
|
|
|
|
|
$ |
31,777 |
|
|
$ |
30,316 |
|
|
|
|
|
|
|
|
Note 10. Other Accrued Expenses and Current Liabilities
Other accrued expenses and current liabilities consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
2004 |
|
Accrued legal and professional fees |
|
$ |
3,077 |
|
|
$ |
2,981 |
|
Accrued roadside assistance claim costs |
|
|
1,582 |
|
|
|
1,417 |
|
Accrued telephone charges |
|
|
371 |
|
|
|
1,088 |
|
Accrued rent |
|
|
623 |
|
|
|
610 |
|
Accrued restructuring charges (see Note 15) |
|
|
|
|
|
|
285 |
|
Accrued value added tax |
|
|
754 |
|
|
|
409 |
|
Other |
|
|
3,867 |
|
|
|
2,596 |
|
|
|
|
|
|
|
|
|
|
$ |
10,274 |
|
|
$ |
9,386 |
|
|
|
|
|
|
|
|
Note 11. Borrowings
On March 15, 2004, the Company entered into a $50.0 million revolving credit facility with a
group of lenders (the Credit Facility), which amount is subject to certain borrowing limitations.
Pursuant to the terms of the Credit
63
Facility, the amount of $50.0 million may be increased up to a maximum of $100.0 million with the
prior written consent of the lenders. The $50.0 million Credit Facility includes a $10.0 million
swingline subfacility, a $15.0 million letter of credit subfacility and a $40.0 million
multi-currency subfacility.
The Credit Facility, which includes certain financial covenants, may be used for general
corporate purposes including acquisitions, share repurchases, working capital support, and letters
of credit, subject to certain limitations. The Credit Facility, including the multi-currency
subfacility, accrues interest, at the Companys option, at (a) the Base Rate (defined as the higher
of the lenders prime rate or the Federal Funds rate plus 0.50%) plus an applicable margin up to
0.50%, or (b) the London Interbank Offered Rate (LIBOR) plus an applicable margin up to 2.25%.
Borrowings under the swingline subfacility accrue interest at the prime rate plus an applicable
margin up to 0.50% and borrowings under the letter of credit subfacility accrue interest at the
LIBOR plus an applicable margin up to 2.25%. In addition, a commitment fee of up to 0.50% is
charged on the unused portion of the Credit Facility on a quarterly basis. The borrowings under
the Credit Facility, which will terminate on March 14, 2008, are secured by a pledge of 65% of the
stock of each of the Companys active direct foreign subsidiaries. The Credit Facility prohibits
the Company from incurring additional indebtedness, subject to certain specific exclusions. There
were no borrowings in 2005 and no outstanding balances as of December 31, 2005 with $50.0 million
availability under the Credit Facility.
Note 12. Accumulated Other Comprehensive Income (Loss)
The Company presents data in the Consolidated Statements of Changes in Shareholders Equity in
accordance with SFAS No. 130 (SFAS 130), Reporting Comprehensive Income. SFAS 130 establishes
rules for the reporting of comprehensive income (loss) and its components. The components of other
accumulated comprehensive income (loss) include foreign currency translation adjustments as follows
(in thousands):
|
|
|
|
|
|
|
Accumulated |
|
|
|
Other |
|
|
|
Comprehensive |
|
|
|
Income (Loss) |
|
Balance at January 1, 2003 |
|
$ |
(11,101 |
) |
Foreign currency translation adjustment |
|
|
10,893 |
|
|
|
|
|
Balance at December 31, 2003 |
|
|
(208 |
) |
Foreign currency translation adjustment |
|
|
5,713 |
|
Less: foreign currency translation gain included in net
income (no tax effect) |
|
|
(634 |
) |
|
|
|
|
Balance at December 31, 2004 |
|
|
4,871 |
|
Foreign currency translation adjustment |
|
|
(8,540 |
) |
Less: foreign currency translation loss included in net
income (no tax effect) |
|
|
234 |
|
|
|
|
|
Balance at December 31, 2005 |
|
$ |
(3,435 |
) |
|
|
|
|
Earnings associated with the Companys investments in its international subsidiaries are considered
to be permanently invested and no provision for United States federal and state income taxes on
those earnings or translation adjustments has been provided.
Note 13. Income Taxes
The income (loss) before provision (benefit) for income taxes includes the following
components (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
United States |
|
$ |
(1,864 |
) |
|
$ |
(14,585 |
) |
|
$ |
(14,013 |
) |
Foreign |
|
|
30,967 |
|
|
|
30,446 |
|
|
|
27,969 |
|
|
|
|
|
|
|
|
|
|
|
Total income before provision for
income taxes |
|
$ |
29,103 |
|
|
$ |
15,861 |
|
|
$ |
13,956 |
|
|
|
|
|
|
|
|
|
|
|
64
Significant components of the income tax provision (benefit) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
|
|
|
$ |
(1,777 |
) |
|
$ |
(1,279 |
) |
State |
|
|
|
|
|
|
(295 |
) |
|
|
(212 |
) |
Foreign |
|
|
7,098 |
|
|
|
6,471 |
|
|
|
7,198 |
|
|
|
|
|
|
|
|
|
|
|
Total current (benefit) provision for income taxes |
|
|
7,098 |
|
|
|
4,399 |
|
|
|
5,707 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
|
|
|
|
1,093 |
|
|
|
(1,532 |
) |
State |
|
|
|
|
|
|
280 |
|
|
|
(692 |
) |
Foreign |
|
|
(1,403 |
) |
|
|
(725 |
) |
|
|
1,168 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred (benefit) provision for income taxes |
|
|
(1,403 |
) |
|
|
648 |
|
|
|
(1,056 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes |
|
$ |
5,695 |
|
|
$ |
5,047 |
|
|
$ |
4,651 |
|
|
|
|
|
|
|
|
|
|
|
The $1.4 million deferred income tax benefit for 2005 includes $0.6 million related to an
adjustment of the beginning of the year valuation allowance balance. This adjustment was due to a
change in circumstances that caused a change in judgment about the Companys ability to realize the
related deferred income tax asset in future years for an EMEA entity. The 2005 deferred income tax
benefit is $0.8 million excluding such adjustment.
The temporary differences that give rise to significant portions of the deferred income tax
provision (benefit) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
Accrued expenses |
|
$ |
380 |
|
|
$ |
3,110 |
|
|
$ |
(2,163 |
) |
Net operating loss and tax credit carryforwards |
|
|
759 |
|
|
|
(8,337 |
) |
|
|
(8,765 |
) |
Depreciation and amortization |
|
|
(427 |
) |
|
|
5,302 |
|
|
|
(1,775 |
) |
Deferred revenue |
|
|
(310 |
) |
|
|
(832 |
) |
|
|
1,942 |
|
Deferred statutory income |
|
|
(576 |
) |
|
|
237 |
|
|
|
966 |
|
Valuation allowance |
|
|
(1,584 |
) |
|
|
(191 |
) |
|
|
10,668 |
|
Other |
|
|
355 |
|
|
|
1,359 |
|
|
|
(1,929 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred (benefit) provision for income taxes |
|
$ |
(1,403 |
) |
|
$ |
648 |
|
|
$ |
(1,056 |
) |
|
|
|
|
|
|
|
|
|
|
The reconciliation of income tax provision (benefit) computed at the U.S. federal statutory
tax rate to the Companys effective income tax provision (benefit) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
Tax at U.S. statutory rate |
|
$ |
10,186 |
|
|
$ |
5,551 |
|
|
$ |
4,885 |
|
State income taxes, net of federal tax benefit |
|
|
(36 |
) |
|
|
(350 |
) |
|
|
(438 |
) |
Tax holidays |
|
|
(2,265 |
) |
|
|
(1,918 |
) |
|
|
(2,763 |
) |
Change in valuation allowance, net of related adjustments |
|
|
1,487 |
|
|
|
1,189 |
|
|
|
5,595 |
|
Foreign rate differential |
|
|
(4,019 |
) |
|
|
(1,654 |
) |
|
|
(2,529 |
) |
Permanent differences |
|
|
(337 |
) |
|
|
1,789 |
|
|
|
143 |
|
Income tax credits |
|
|
|
|
|
|
|
|
|
|
(391 |
) |
Foreign withholding and other taxes |
|
|
631 |
|
|
|
879 |
|
|
|
520 |
|
Other |
|
|
48 |
|
|
|
(439 |
) |
|
|
(371 |
) |
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes |
|
$ |
5,695 |
|
|
$ |
5,047 |
|
|
$ |
4,651 |
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and the amounts used for
income taxes. A provision for income taxes has not been made for the undistributed earnings of
foreign subsidiaries of approximately $190.2 million at December 31, 2005, that are permanently
reinvested in foreign business operations. Determination of any unrecognized deferred tax liability
for temporary differences related to investments in foreign subsidiaries that are essentially
permanent in nature is not practicable.
65
The Company has been granted tax holidays in the Philippines, El Salvador, India and Costa
Rica. One agreement in the Philippines expired in the fourth quarter of 2005 without possibility
for renewal. The remaining tax holidays have various expiration dates primarily from 2006 through
2013. Upon expiration, the Company intends to seek renewals of these tax holidays.
The temporary differences that give rise to significant portions of the deferred tax assets
and liabilities as of December 31, 2005 and 2004, respectively, are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
2,450 |
|
|
$ |
3,223 |
|
Net operating loss and tax credit carryforwards |
|
|
43,270 |
|
|
|
44,029 |
|
Depreciation and amortization |
|
|
10,018 |
|
|
|
10,198 |
|
Deferred revenue |
|
|
2,703 |
|
|
|
2,393 |
|
Valuation allowance |
|
|
(28,807 |
) |
|
|
(30,391 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,634 |
|
|
|
29,452 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Accrued liabilities |
|
|
(1,680 |
) |
|
|
(2,073 |
) |
Depreciation and amortization |
|
|
(8,167 |
) |
|
|
(8,774 |
) |
Deferred statutory income |
|
|
(1,924 |
) |
|
|
(2,500 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,771 |
) |
|
|
(13,347 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
17,863 |
|
|
$ |
16,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified as follows: |
|
|
|
|
|
|
|
|
Current assets (Prepaid expenses and other) (Note 5) |
|
$ |
3,263 |
|
|
$ |
4,419 |
|
Non-current assets (Deferred charges and other) (Note 8). |
|
|
16,624 |
|
|
|
14,225 |
|
Current liabilities (Other accrued expenses) |
|
|
(60 |
) |
|
|
(42 |
) |
Non-current liabilities (Other long-term liabilities) |
|
|
(1,964 |
) |
|
|
(2,497 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
17,863 |
|
|
$ |
16,105 |
|
|
|
|
|
|
|
|
SFAS No. 109, Accounting for Income Taxes, requires a valuation allowance to reduce the
deferred tax assets reported if, based on the weight of the available evidence, both positive and
negative, for each respective tax jurisdiction, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. At December 31, 2005, management has determined
that a valuation allowance of approximately $28.8 million is necessary to reduce U.S. deferred tax
assets by $9.9 million and foreign deferred tax assets by $18.9 million.
There is approximately $120.7 million of the income tax loss carryforwards at December 31,
2005, of which $68.8 million relates to foreign entities and $51.9 million related to the U.S.,
with various expiration dates. For U.S. purposes, a net operating loss carryforward of
approximately $51.9 million and $3.9 million of tax credits are available at December 31, 2005 for
carryforward, with the latest expiration date ending December 31, 2025. Of this U.S. $51.9 million
carryforward, $10.1 million is limited and can only be offset against the future earnings of an
acquired subsidiary.
The Company is currently under examination in the U.S. by several states for sales and use
taxes and franchise taxes for periods covering 1999 through 2003. The U.S. Internal Revenue Service
completed audits of the Companys U.S. tax returns through July 31, 1999 and is currently auditing
the tax year ended July 31, 2002. Certain German subsidiaries of the Company are under examination
by the German tax authorities for periods covering 1997 through 2000. Additionally, certain
Canadian subsidiaries are under examination by Canadian tax authorities for the periods covering
1993 through 2003 and an Asian subsidiary is being audited by the Asian tax authorities for tax
years 2003 and 2004.
As of December 31, 2005 and 2004, the Company had a contingent income tax liability of $3.2
million and $2.9 million, respectively, consisting of amounts for subsidiaries located in both the
Americas and EMEA segments that is accounted for in Income taxes payable in the accompanying
Consolidated Balance Sheets. The amount of the contingent liability is based on an estimate of the
probable liability in accordance with SFAS 5 Accounting for
66
Contingencies, using available evidence, including detailed analyses of the potential income tax
issues, income tax assessments and notices of disallowance, consultation with independent outside
tax and legal advisors and the Companys historical experience in settling similar issues without
additional income tax liability. Management believes that the $3.2 million contingent income tax
liability, an increase of $0.3 million from December 31, 2004, is the probable amount that will be
paid upon settlement of the related tax audits based on current available evidence and issues and
does not believe there would be a material impact on liquidity beyond what has been provided for in
Income taxes payable. A change in the estimate of the contingent tax liability is possible and
may occur upon resolution of the related issues under formal appeal procedures.
On October 22, 2004 the President signed the American Jobs Creation Act of 2004 (the Act).
The Act created a temporary incentive for U.S. corporations to repatriate accumulated income earned
abroad by providing an 85 percent dividends received deduction for certain dividends from
controlled foreign corporations. The incentive was available only for 2005 and was subject to a
number of limitations. Based on a cost-benefit analysis, the Company decided not to repatriate any
foreign income under the Act.
Note 14. Termination Costs Associated With Exit Activities
On November 3, 2005, the Company committed to a plan (the Plan) to reduce its workforce by
approximately 200 people in one of its European customer contact management centers in Germany in
response to the October 2005 contractual expiration of a technology client program, which generated
annual revenues of approximately $12.0 million. The Company expects to complete the Plan by the end
of the second quarter of 2006. The Company estimates that during the fourth quarter of 2005 and the
first half of 2006, it will incur total charges related to the Plan of approximately $1.3 million
to $1.6 million. These charges include approximately $1.1 million to $1.2 million for severance and
related costs and $0.1 million to $0.2 million for other exit costs. Additionally, upon completion
of the Plan, the Company will cease using certain property and equipment estimated at $0.2 million,
and has begun to depreciate these assets over the shortened useful life, which approximates eight
months. As a result, the Company will record additional depreciation of approximately $0.1 million
to $0.2 million during the eight-month period ended June 30, 2006. Termination costs of $0.5
million are included in Direct salaries and related costs in the accompanying 2005 Consolidated
Statement of Operations. Cash payments related to these termination costs totaled less than $0.1
million for the year ended December 31, 2005.
On January 19, 2005, the Company announced to its workforce that, as part of its continued
efforts to optimize assets and improve operating performance, it would migrate the call volumes of
the customer contact management services and related operations from its Bangalore, India facility,
a component of the Companys Americas segment, to other offshore facilities. Before the plan of
migration, the Companys Bangalore facility generated approximately $0.9 million in revenue in the
first quarter of 2005. The Company substantially completed the plan of migration, including the
redeployment of site infrastructure and the recruiting, training and ramping-up of agents
associated with the migration of Bangalore call volumes to other offshore facilities, in the second
quarter of 2005. In connection with this migration, the Company terminated 413 employees and
accrued over their remaining service period, an estimated liability for termination costs of $0.2
million based on the fair value as of the termination date, in accordance SFAS No. 146, Accounting
for Costs associated with Exit or Disposal Activities. These termination costs are included in
Direct salaries and related costs in the accompanying Consolidated Statement of Operations for
the year ended December 31, 2005. Cash payments related to these termination costs totaled $0.2
million during the year ended December 31, 2005.
During the first quarter of 2004, the Company determined to reduce costs by consolidating and
closing two European customer contact management centers in Germany. The plan was substantially
completed by the end of the second quarter of 2004. In connection with these closures, the Company
terminated 240 employees and accrued over their remaining service period, an estimated liability
for termination costs of $1.7 million based on the fair value as of the termination date, in
accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities".
Termination costs of $1.7 million are included in Direct salaries and related costs in the
accompanying 2004 Consolidated Statement of Operations. Cash payments totaled $1.7 million during
the year ended December 31, 2004.
67
Note 15. Restructuring and Other Charges
2002 Charges
In October 2002, the Company approved a restructuring plan to close and consolidate two U.S.
and three European customer contact management centers, to reduce capacity within the European
fulfillment operations and to write-off certain specialized e-commerce assets primarily in response
to the October 2002 notification of the contractual expiration of two technology client programs in
March 2003 with approximate annual revenues of $25.0 million. The restructuring plan was designed
to reduce costs and bring the Companys infrastructure in-line with the current business
environment. Related to these actions, the Company recorded restructuring and other charges in the
fourth quarter of 2002 of $20.8 million primarily for the write-off of certain assets, lease
termination and severance costs. In connection with the 2002 restructuring, the Company reduced the
number of employees by 470 during 2002 and 330 during 2003. The plan was substantially completed by
the end of 2003.
In connection with the contractual expiration of the two technology client contracts
previously mentioned, the Company also recorded additional depreciation expense of $1.2 million in
the fourth quarter of 2002 and $1.3 million in the first quarter of 2003 primarily related to a
specialized technology platform, which was no longer utilized upon the expiration of the contracts
in March 2003.
The following tables summarize the 2002 plan accrued liability for restructuring and other
charges and related activity in 2005, 2004, 2003 and 2002 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
Other |
|
|
Balance at |
|
|
|
January 1, |
|
|
Cash |
|
|
Non-Cash |
|
|
December 31, |
|
|
|
2005 |
|
|
Outlays |
|
|
Changes(1) |
|
|
2005 |
|
|
|
|
Severance and related costs |
|
$ |
106 |
|
|
$ |
(34 |
) |
|
$ |
(72 |
) |
|
$ |
|
|
Other restructuring costs |
|
|
285 |
|
|
|
(43 |
) |
|
|
(242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
391 |
|
|
$ |
(77 |
) |
|
$ |
(314 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
Other |
|
|
Balance at |
|
|
|
January 1, |
|
|
Cash |
|
|
Non-Cash |
|
|
December 31, |
|
|
|
2004 |
|
|
Outlays |
|
|
Changes(2) |
|
|
2004 (3) |
|
|
|
|
Severance and related costs |
|
$ |
106 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
106 |
|
Lease termination costs |
|
|
342 |
|
|
|
(301 |
) |
|
|
(41 |
) |
|
|
|
|
Other restructuring costs |
|
|
545 |
|
|
|
(188 |
) |
|
|
(72 |
) |
|
|
285 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
993 |
|
|
$ |
(489 |
) |
|
$ |
(113 |
) |
|
$ |
391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
Other |
|
|
Balance at |
|
|
|
January 1, |
|
|
Cash |
|
|
Non-Cash |
|
|
December 31, |
|
|
|
2003 |
|
|
Outlays |
|
|
Changes |
|
|
2003 |
|
|
|
|
Severance and related costs |
|
$ |
4,696 |
|
|
$ |
(3,816 |
) |
|
$ |
(774 |
) (4) |
|
$ |
106 |
|
Lease termination costs |
|
|
1,827 |
|
|
|
(1,585 |
) |
|
|
100 |
(5) |
|
|
342 |
|
Other restructuring costs |
|
|
1,852 |
|
|
|
(1,512 |
) |
|
|
205 |
(6) |
|
|
545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
8,375 |
|
|
$ |
(6,913 |
) |
|
$ |
(469 |
) |
|
$ |
993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Balance at |
|
|
|
January 1, |
|
|
2002 |
|
|
Cash |
|
|
Non-Cash |
|
|
December 31, |
|
|
|
2002 |
|
|
Charges |
|
|
Outlays |
|
|
Changes |
|
|
2002 |
|
|
|
|
Severance and related costs |
|
$ |
|
|
|
$ |
5,012 |
|
|
$ |
(316 |
) |
|
$ |
|
|
|
$ |
4,696 |
|
Lease termination costs |
|
|
|
|
|
|
1,827 |
|
|
|
|
|
|
|
|
|
|
|
1,827 |
|
Write-down of property, equipment
and capitalized costs |
|
|
|
|
|
|
12,017 |
|
|
|
|
|
|
|
(12,017 |
) |
|
|
|
|
Other restructuring costs |
|
|
|
|
|
|
1,958 |
|
|
|
(106 |
) |
|
|
|
|
|
|
1,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
20,814 |
|
|
$ |
(422 |
) |
|
$ |
(12,017 |
) |
|
$ |
8,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
(1) |
|
During 2005, the Company reversed $0.3 million related to severance and related costs and
certain other closing costs associated primarily with the closure of certain European contact
management centers.
|
|
(2) |
|
During 2004, the Company reversed $0.1 million
related to the remaining lease termination and closing costs for two of its European customer
contact management centers and one European fulfillment center. |
|
(3) |
|
Included in Other accrued expenses and current liabilities in the accompanying Consolidated Balance Sheet, except $0.1 million of severance and related costs which is included in Accrued employee compensation and
benefits. |
|
(4) |
|
During 2003, the Company reversed $0.8 million of the severance accrual related to the
final termination settlement for the closure of two of its European customer contact management
centers and one European fulfillment center. |
|
(5) |
|
During 2003, the Company recorded $0.1 million in additional lease termination costs
primarily related to the final settlement of the lease for one of its European customer contact
management centers. |
|
(6) |
|
During 2003, the Company recorded $0.3 million in additional site closure costs related to
one of its European customer contact management centers offset by $0.1 million for the reversal
of the remaining site closure costs for its Galashiels, Scotland print facility and its
Scottsbluff, Nebraska facility, which were both sold in 2003. |
2001 Charges
In December 2001, in response to the economic slowdown and increasing demand for the Companys
offshore capabilities, the Company approved a cost reduction plan designed to improve efficiencies
in its core business. As a result of the Companys cost reduction plan, the Company recorded $16.1
million in restructuring, other and impairment charges during the fourth quarter of 2001. This
included $14.6 million in charges related to the closure and consolidation of two U.S. customer
contact management centers, two U.S. technical staffing offices, one European fulfillment center;
the elimination of redundant property, leasehold improvements and equipment; lease termination
costs associated with vacated properties and equipment and severance and related costs. In
connection with the fourth quarter 2001 restructuring, the Company reduced the number of employees
by 230 during the first quarter of 2002. The restructuring charge also included $1.4 million for
future lease obligations related to closed facilities. In connection with this restructuring, the
Company also recorded a $1.5 million impairment charge related to the write-off of certain
nonperforming assets, including software and equipment no longer used by the Company.
The following tables summarize the 2001 plan accrued liability for restructuring and other
charges and related activity in 2003, 2002 and 2001 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
Other |
|
|
Balance at |
|
|
|
January 1, |
|
|
Cash |
|
|
Non-Cash |
|
|
December 31, |
|
|
|
2003 |
|
|
Outlays |
|
|
Changes(1) |
|
|
2003 |
|
|
|
|
Severance and related costs |
|
$ |
153 |
|
|
$ |
(153 |
) |
|
$ |
|
|
|
$ |
|
|
Lease termination costs |
|
|
161 |
|
|
|
(121 |
) |
|
|
(40 |
) |
|
|
|
|
Other restructuring costs |
|
|
32 |
|
|
|
(15 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
346 |
|
|
$ |
(289 |
) |
|
$ |
(57 |
) |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
Other |
|
|
Balance at |
|
|
|
January 1, |
|
|
Cash |
|
|
Non-Cash |
|
|
December 31, |
|
|
|
2002 |
|
|
Outlays |
|
|
Changes |
|
|
2002 |
|
|
|
|
Severance and related costs |
|
$ |
1,423 |
|
|
$ |
(1,270 |
) |
|
$ |
|
|
|
$ |
153 |
|
Lease termination costs |
|
|
1,355 |
|
|
|
(1,397 |
) |
|
|
203 |
(2) |
|
|
161 |
|
Write-down of property, equipment
and capitalized costs |
|
|
3,220 |
|
|
|
|
|
|
|
(3,220 |
) |
|
|
|
|
Other restructuring costs |
|
|
292 |
|
|
|
(260 |
) |
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,290 |
|
|
$ |
(2,927 |
) |
|
$ |
(3,017 |
) |
|
$ |
346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Balance at |
|
|
|
January 1, |
|
|
2001 |
|
|
Cash |
|
|
Non-Cash |
|
|
December 31, |
|
|
|
2001 |
|
|
Charges |
|
|
Outlays |
|
|
Changes |
|
|
2001 |
|
|
|
|
Severance and related costs |
|
$ |
|
|
|
$ |
1,456 |
|
|
$ |
(33 |
) |
|
$ |
|
|
|
$ |
1,423 |
|
Lease termination costs |
|
|
|
|
|
|
1,426 |
|
|
|
(71 |
) |
|
|
|
|
|
|
1,355 |
|
Write-down of property, equipment
and capitalized costs |
|
|
|
|
|
|
8,826 |
|
|
|
|
|
|
|
(5,606 |
) |
|
|
3,220 |
|
Write-down of intangible assets |
|
|
|
|
|
|
2,600 |
|
|
|
|
|
|
|
(2,600 |
) |
|
|
|
|
Other restructuring costs |
|
|
|
|
|
|
292 |
|
|
|
|
|
|
|
|
|
|
|
292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,600 |
|
|
|
(104 |
) |
|
|
(8,206 |
) |
|
|
6,290 |
|
Impairment of software and
equipment |
|
|
|
|
|
|
1,480 |
|
|
|
|
|
|
|
(1,480 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
16,080 |
|
|
$ |
(104 |
) |
|
$ |
(9,686 |
) |
|
$ |
6,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
During 2003, the Company reversed accruals related to the final settlement of lease termination
and other costs. |
|
(2) |
|
During 2002, the Company recorded $0.2 million in additional lease termination costs related to
one of the European customer contact management centers. |
2000 Charges
The Company recorded restructuring and other charges during the second and fourth quarters of
2000 approximating $30.5 million. The second quarter restructuring and other charges approximating
$9.6 million resulted from the Companys consolidation of several European and one U.S. fulfillment
center and the closing or consolidation of six technical staffing offices. Included in the second
quarter 2000 restructuring and other charges was a $3.5 million lease termination payment to the
founder and former Chairman of the Company related to the termination of a ten-year operating lease
agreement for use of his private jet. As a result of the second quarter 2000 restructuring, the
Company reduced the number of employees by 157 during 2000 and satisfied the remaining lease
obligations related to the closed facilities during 2001.
The Company also announced, after a comprehensive review of operations, its decision to exit
certain non-core, lower margin businesses to reduce costs, improve operating efficiencies and focus
on its core competencies of technical support, customer service and consulting solutions. As a
result, the Company recorded $20.9 million in restructuring and other charges during the fourth
quarter of 2000 related to the closure of its U.S. fulfillment operations, the consolidation of its
Tampa, Florida technical support center and the exit of its worldwide localization operations.
Included in the fourth quarter 2000 restructuring and other charges is a $2.4 million severance
payment related to the employment contract of the Companys former President. In connection with
the fourth quarter 2000 restructuring, the Company reduced the number of employees by 245 during
the first half of 2001 and satisfied a significant portion of the remaining lease obligations
related to the closed facilities during 2001.
The following tables summarize the 2000 plan accrued liability for restructuring and other
charges and related activity in 2005, 2004, 2003, 2002, 2001 and 2000 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
Other |
|
|
Balance at |
|
|
|
January 1, |
|
|
Cash |
|
|
Non-Cash |
|
|
December 31, |
|
|
|
2005 |
|
|
Outlays |
|
|
Changes |
|
|
2005 |
|
|
|
|
Severance and related costs |
|
$ |
87 |
|
|
$ |
(87 |
) |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
Other |
|
|
Balance at |
|
|
|
January 1, |
|
|
Cash |
|
|
Non-Cash |
|
|
December 31, |
|
|
|
2004 |
|
|
Outlays |
|
|
Changes |
|
|
2004 (1) |
|
|
|
|
Severance and related costs |
|
$ |
588 |
|
|
$ |
(501 |
) |
|
$ |
|
|
|
$ |
87 |
|
Lease termination costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
588 |
|
|
$ |
(501 |
) |
|
$ |
|
|
|
$ |
87 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
Other |
|
|
Balance at |
|
|
|
January 1, |
|
|
Cash |
|
|
Non-Cash |
|
|
December 31, |
|
|
|
2003 |
|
|
Outlays |
|
|
Changes |
|
|
2003 |
|
|
|
|
Severance and related costs |
|
$ |
1,053 |
|
|
$ |
(465 |
) |
|
$ |
|
|
|
$ |
588 |
|
Lease termination costs |
|
|
120 |
|
|
|
|
|
|
|
(120 |
)(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,173 |
|
|
$ |
(465 |
) |
|
$ |
(120 |
) |
|
$ |
588 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
Other |
|
|
Balance at |
|
|
|
January 1, |
|
|
Cash |
|
|
Non-Cash |
|
|
December 31, |
|
|
|
2002 |
|
|
Outlays |
|
|
Changes |
|
|
2002 |
|
|
|
|
Severance and related costs |
|
$ |
1,485 |
|
|
$ |
(646 |
) |
|
$ |
214 |
(3) |
|
$ |
1,053 |
|
Lease termination costs |
|
|
143 |
|
|
|
(23 |
) |
|
|
|
|
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,628 |
|
|
$ |
(669 |
) |
|
$ |
214 |
|
|
$ |
1,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
Other |
|
|
Balance at |
|
|
|
January 1, |
|
|
Cash |
|
|
Non-Cash |
|
|
December 31, |
|
|
|
2001 |
|
|
Outlays |
|
|
Changes |
|
|
2001 |
|
|
|
|
Severance and related costs |
|
$ |
3,062 |
|
|
$ |
(1,288 |
) |
|
$ |
(289 |
)(4) |
|
$ |
1,485 |
|
Lease termination costs |
|
|
1,288 |
|
|
|
(1,145 |
) |
|
|
|
|
|
|
143 |
|
Other restructuring costs |
|
|
718 |
|
|
|
(718 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,068 |
|
|
$ |
(3,151 |
) |
|
$ |
(289 |
) |
|
$ |
1,628 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at |
|
|
|
|
|
|
|
|
|
|
Other |
|
|
Balance at |
|
|
|
January 1, |
|
|
2000 |
|
|
Cash |
|
|
Non-Cash |
|
|
December 31, |
|
|
|
2000 |
|
|
Charges |
|
|
Outlays |
|
|
Changes |
|
|
2000 |
|
|
|
|
Severance and related costs |
|
$ |
|
|
|
$ |
3,974 |
|
|
$ |
(912 |
) |
|
$ |
|
|
|
$ |
3,062 |
|
Lease termination costs |
|
|
|
|
|
|
5,404 |
|
|
|
(4,116 |
) |
|
|
|
|
|
|
1,288 |
|
Write-down of property, equipment |
|
|
|
|
|
|
14,191 |
|
|
|
|
|
|
|
(14,191 |
) |
|
|
|
|
Write-down of intangible assets |
|
|
|
|
|
|
6,086 |
|
|
|
|
|
|
|
(6,086 |
) |
|
|
|
|
Other restructuring costs |
|
|
|
|
|
|
813 |
|
|
|
(95 |
) |
|
|
|
|
|
|
718 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
30,468 |
|
|
$ |
(5,123 |
) |
|
$ |
(20,277 |
) |
|
$ |
5,068 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in Accrued employee compensation and benefits in the accompanying Consolidated
Balance Sheets. |
|
(2) |
|
During 2003, the Company reversed accruals related to the final settlement of lease termination
costs. |
|
(3) |
|
During 2002, the Company recorded $0.2 million in additional severance and related costs
primarily due to delays in closing its U.S. fulfillment center, which increased the cash outlay
requirements for severance. |
|
(4) |
|
During 2001, the Company reduced the original severance accrual by $0.3 million for severance
payments due to the Companys former president. |
Note 16. Earnings Per Share
Basic earnings per share are based on the weighted average number of common shares outstanding
during the periods. Diluted earnings per share includes the weighted average number of common
shares outstanding during the respective periods and the further dilutive effect, if any, from
stock options, common stock units and shares held in a rabbi trust using the treasury stock method.
For the years ended December 31, 2005, 2004 and 2003, options to purchase shares of common stock of
0.5 million, 2.4 million and 2.9 million, respectively, at various prices were antidilutive and
were excluded from the calculation of diluted earnings per share.
71
The numbers of shares used in the earnings per share computation are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
39,204 |
|
|
|
39,607 |
|
|
|
40,300 |
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of stock options, common stock
units and shares held in a rabbi trust |
|
|
332 |
|
|
|
115 |
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total weighted average diluted shares outstanding |
|
|
39,536 |
|
|
|
39,722 |
|
|
|
40,441 |
|
|
|
|
|
|
|
|
|
|
|
On August 5, 2002, the Companys Board of Directors authorized the Company to purchase of up
to three million shares of its outstanding common stock. A total of 1.6 million shares have been
repurchased under this program since inception. The shares are purchased, from time to time,
through open market purchases or in negotiated private transactions, and the purchases are based on
factors such as, including but not limited to, the stock price and general market conditions. For
the year ended December 31, 2004, the Company repurchased 1.1 million common shares under the 2002
repurchase program at prices ranging between $5.55 to $7.58 per share for a total cost of $7.1
million. During 2005, the Company made no purchases under the 2002 repurchase program.
Note 17. Commitments and Contingencies
The Company leases certain equipment and buildings under operating leases having original
terms ranging from one to twenty-five years, some with options to cancel at varying points during
the lease. The building leases contain up to two five-year renewal options. Rental expense under
operating leases for the years ended December 31, 2005, 2004 and 2003 was approximately $16.5
million, $18.4 million, and $13.4 million, respectively.
The following is a schedule of future minimum rental payments under operating leases having a
remaining non-cancelable term in excess of one year subsequent to December 31, 2005 (in thousands):
|
|
|
|
|
|
|
Total |
|
Year |
|
Amount |
|
|
2006 |
|
$ |
11,562 |
|
2007 |
|
|
4,983 |
|
2008 |
|
|
3,714 |
|
2009 |
|
|
3,573 |
|
2010 |
|
|
3,357 |
|
Thereafter |
|
|
11,096 |
|
|
|
|
|
Total minimum payments required |
|
$ |
38,285 |
|
|
|
|
|
A lease agreement, relating to the Companys customer contact management center in Ireland,
contains a cancellation clause which requires the Company, in the event of cancellation, to restore
the facility to its original state at an estimated cost of $0.6 million as of December 31, 2005 and
pay a cancellation fee of $0.5 million, which
approximates two annual rental payments under the lease agreement. In addition, under certain
circumstances (including cancellation of the lease and cessation of the centers operations in the
facility), the Company is contingently liable until July 29, 2006 to repay any proceeds received in
association with the facilitys grant agreement. As of December 31, 2005, the grant proceeds
subject to repayment approximated $1.0 million. As of December 31, 2005, the Company had no plans
to cancel this lease agreement. Therefore, the Company does not expect to make any payments under
this agreement and, accordingly, has not recorded a liability in the accompanying Consolidated
Balance Sheets.
The Company enters into agreements with third-party vendors in the ordinary course of business
whereby the Company commits to purchase goods and services used in its normal operations. These
agreements, which are not cancelable, generally range from one to five year periods and contain
fixed or minimum annual commitments. Certain of these agreements allow for renegotiation of the
minimum annual commitments based on certain conditions.
72
The following is a schedule of future minimum purchases remaining under the agreements as of
December 31, 2005 (in thousands):
|
|
|
|
|
|
|
Total |
|
Year |
|
Amount |
|
|
2006 |
|
$ |
12,198 |
|
2007 |
|
|
3,156 |
|
|
|
|
|
Total minimum payments required |
|
$ |
15,354 |
|
|
|
|
|
From time to time, during the normal course of business, the Company may make certain
indemnities, commitments and guarantees under which it may be required to make payments in relation
to certain transactions. These include, but are not limited to: (i) indemnities to clients, vendors
and service providers pertaining to claims based on negligence or willful misconduct of the Company
and (ii) indemnities involving breach of contract, the accuracy of representations and warranties
of the Company, or other liabilities assumed by the Company in certain contracts. In addition, the
Company has agreements whereby it will indemnify certain officers and directors for certain events
or occurrences while the officer or director is, or was, serving at the Companys request in such
capacity. The indemnification period covers all pertinent events and occurrences during the
officers or directors lifetime. The maximum potential amount of future payments the Company could
be required to make under these indemnification agreements is unlimited; however, the Company has
director and officer insurance coverage that limits its exposure and enables it to recover a
portion of any future amounts paid. The Company believes the applicable insurance coverage is
generally adequate to cover any estimated potential liability under these indemnification
agreements. The majority of these indemnities, commitments and guarantees do not provide for any
limitation of the maximum potential for future payments the Company could be obligated to make. The
Company has not recorded any liability for these indemnities, commitments and other guarantees in
the accompanying Consolidated Balance Sheets. In addition, the Company has some client contracts
that do not contain contractual provisions for the limitation of liability, and other client
contracts that contain agreed upon exceptions to limitation of liability. The Company has not
recorded any liability in the accompanying Consolidated Balance Sheets with respect to any client
contracts under which the Company has or may have unlimited liability.
The Company from time to time is involved in other legal actions arising in the ordinary
course of business. With respect to these matters, management believes that it has adequate legal
defenses and/or provided adequate accruals for related costs such that the ultimate outcome will
not have a material adverse effect on the Companys financial position or results of operations.
Note 18. Employee Benefit Plans
The Company maintains a 401(k) plan covering defined employees who meet established
eligibility requirements. Under the plan provisions, the Company matched 50% of participant
contributions to a maximum matching amount of 2% of participant compensation. The Company
contribution was $0.6 million, $0.5 million, $0.8 million (including $0.2 million to reimburse the
401(k) plan for commissions previously paid to a member of the Companys Board of Directors as
discussed in Note 21) for the years ended December 31, 2005, 2004 and 2003, respectively.
The Company has a non-qualified deferred compensation plan that provides certain key employees
the ability to defer any portion of their compensation until the participants retirement,
termination, disability or death, or a
change in control of the Company. Using the Companys common stock, the Company matches 50% of the
amounts deferred by a participant on a quarterly basis up to a total of $12,000 per year for senior
vice presidents and $7,500 per year for vice presidents and other participants. Matching
contributions and the associated earnings vest over a ten year service period. Deferred
compensation amounts used to pay benefits, which are held in a rabbi trust, include investments in
various mutual funds and shares of the Companys common stock (See Note 1, Summary of Accounting
Policies, under Investments Held in Rabbi Trust.) The deferred compensation plans assets totaled
$0.7 million at December 31, 2005, excluding the Companys common stock match, while the plans
liabilities totaled $1.0 million. The assets and liabilities of the deferred compensation plan were
recorded in deferred charges and other assets, treasury stock, additional paid-in capital, and
long-term liabilities, as appropriate, in the accompanying Consolidated Balance Sheets.
On January 1, 2005, the Company established a Post-Retirement Defined Contribution Healthcare
Plan (the Plan) for eligible employees meeting certain service and age requirements. The Plan is
fully funded by the participants and accordingly, the Company does not recognize expense relating
to the Plan.
73
Note 19. Stock Options and Common Stock Units
The Company maintains various stock option plans for its employees. Options to employees are
granted at not less than fair market value on the date of the grant and generally vest over one to
four years. All options granted to employees under the Companys stock option plans expire if not
exercised by the tenth anniversary of their grant date.
Until May 2004, the Company maintained a stock option plan that provided for the
automatic grant of non-qualified stock options to members of the Board of Directors who were not
employees of the Company. Under the plan, each new non-employee director was granted an option to
purchase 25,000 shares of common stock upon his or her election to the Board. Each continuing
non-employee director was granted an option to purchase an additional 10,000 shares of common stock
on the day after each annual shareholders meeting. All of the options have an exercise price equal
to the fair market value on the date of grant, and become exercisable ratably over one to three
years. All options granted to non-employee directors are exercisable for ten years from the date of
grant, unless the non-employee directors service is terminated whether by reason of death,
retirement, resignation, removal or failure to be reelected at the end of his or her term. No
options were granted at or after the May 2004 Annual Meeting of Shareholders.
At December 31, 2005, there were 7.0 million shares of common stock reserved for
issuance under all of the Companys stock option plans. For all plans, options of 1.1 million, 2.5
million, and 2.4 million were exercisable at December 31, 2005, 2004 and 2003 with a weighted
average exercise price of $10.23, $10.35 and $11.50, respectively. There were 6.3 million, 4.7
million and 4.5 million shares available for grant under the plans at December 31, 2005, 2004, and
2003, respectively.
The following table summarizes stock option activity for each of the three years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Exercise |
|
|
|
(In thousands) |
|
|
Price |
|
|
|
|
Outstanding at January 1, 2003 |
|
|
3,500 |
|
|
$ |
10.39 |
|
Granted |
|
|
163 |
|
|
$ |
5.80 |
|
Exercised |
|
|
(195 |
) |
|
$ |
4.23 |
|
Expired or terminated |
|
|
(307 |
) |
|
$ |
10.40 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2003 |
|
|
3,161 |
|
|
$ |
10.54 |
|
Granted |
|
|
|
|
|
$ |
|
|
Exercised |
|
|
(36 |
) |
|
$ |
4.56 |
|
Expired or terminated |
|
|
(348 |
) |
|
$ |
14.53 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004 |
|
|
2,777 |
|
|
$ |
10.12 |
|
Granted |
|
|
|
|
|
$ |
|
|
Exercised |
|
|
(133 |
) |
|
$ |
6.08 |
|
Expired or terminated |
|
|
(1,431 |
) |
|
$ |
10.57 |
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2005 |
|
|
1,213 |
|
|
$ |
10.03 |
|
|
|
|
|
|
|
|
|
74
The following table further summarizes significant ranges of outstanding and exercisable
options at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
Weighted |
|
|
Weighted |
|
|
Number |
|
|
Weighted |
|
|
|
Outstanding at |
|
|
Average |
|
|
Average |
|
|
Exercisable at |
|
|
Average |
|
Range of |
|
Dec. 31, 2005 |
|
|
Remaining |
|
|
Exercise |
|
|
Dec. 31, 2005 |
|
|
Exercise |
|
Exercise Prices |
|
(In thousands) |
|
|
Life (Years) |
|
|
Price |
|
|
(In thousands) |
|
|
Price |
|
|
under $4.00 |
|
|
57 |
|
|
|
7.0 |
|
|
$ |
3.15 |
|
|
|
42 |
|
|
$ |
3.15 |
|
$4.01 to $6.00 |
|
|
373 |
|
|
|
5.7 |
|
|
$ |
5.03 |
|
|
|
358 |
|
|
$ |
5.00 |
|
$6.01 to $9.00 |
|
|
185 |
|
|
|
5.5 |
|
|
$ |
8.53 |
|
|
|
156 |
|
|
$ |
8.62 |
|
$9.01 to $13.00 |
|
|
302 |
|
|
|
6.0 |
|
|
$ |
10.04 |
|
|
|
269 |
|
|
$ |
10.03 |
|
$13.01 to $19.00 |
|
|
192 |
|
|
|
4.3 |
|
|
$ |
16.27 |
|
|
|
191 |
|
|
$ |
16.27 |
|
$19.01 to $28.00 |
|
|
104 |
|
|
|
2.6 |
|
|
$ |
22.96 |
|
|
|
103 |
|
|
$ |
22.96 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,213 |
|
|
|
5.3 |
|
|
$ |
10.03 |
|
|
|
1,119 |
|
|
$ |
10.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan The Companys Employee Stock Purchase Plan (the ESPP), which
qualifies under Section 423 of the Internal Revenue Code of 1986, allowed eligible employees to
purchase the Companys common stock through payroll deductions at 87.5% of the market price on the
last day of the offering period, subject to certain maximum limitations. Effective June 30, 2003,
the Companys Board of Directors decided to terminate the ESPP due to limited employee
participation and costs associated with administrating it. Accordingly, the remaining 0.8 million
shares of the Companys common stock previously reserved are no longer available for future
issuance under the ESPP as of June 30, 2003, the termination date.
The weighted average fair value share price of the purchase rights granted under the ESPP
during the year ended December 31, 2003 (before the termination date) was $3.80. For the year ended
December 31, 2003 0.03 million of such shares were purchased by eligible employees.
Non-Employee Director Fee Plan In May 2004, the Board of Directors approved a new
Non-Employee Director Fee Plan (the Plan) that was later approved by the shareholders at the 2005
Annual Shareholders Meeting. The Board of Directors determined that this Plan would replace and
supersede the 1996 Non-Employee Director Fee Plan and would be used in lieu of the 2004 Nonemployee
Director Stock Option Plan (the Stock Option Plan). No options have been awarded under the Stock
Option Plan and none will be awarded. The Plan provides that all new non-employee Directors joining
the Board receive an initial grant of common stock units (CSUs) on the date the new Director is
appointed or elected, the number of which will be determined by dividing a dollar amount to be
determined from time to time by the Board (initially set at $30,000) by an amount equal to 110% of
the average closing prices of the Companys common stock for the five trading days prior to the
date the new Director is appointed or elected. The initial grant of CSUs will vest in three equal
installments, one-third on the date of each of the following three annual shareholders meetings.
A CSU is a bookkeeping entry on the Companys books that records the equivalent of one share
of common stock. On the date each CSU vests, the Director will become entitled to receive a share
of the Companys common stock and the CSU will be canceled. For federal income tax purposes, the
Director will not be deemed to have received income with respect to the CSUs until the CSUs vest.
Additionally, the Plan provides that each non-employee Director who was serving as a Director
immediately prior to each Annual Shareholders Meeting will receive, on the day after the annual
meeting, an annual retainer for service as a non-employee Director, the amount of which shall be
determined from time to time by the Board. The Board increased the amount of the annual retainer
from $25,000 under the 1996 Fee Plan to $50,000 under the Plan. Under the Plan, the annual
retainer will be paid 75% in CSUs and 25% in cash. Previously, the annual retainer was payable
one-half in cash and one-half in CSUs. The number of CSUs to be granted under the Plan will be
determined by dividing the amount of the annual retainer by an amount equal to 105% of the average
of the closing prices for the Companys common stock on the five trading days preceding the award
date (the day after the annual meeting). The annual grant of CSUs will vest in two equal
installments, one-half on the date of each of the following two annual shareholders meetings.
All CSUs will automatically vest upon the termination of a Directors service as a Director,
whether by reason of death, retirement, resignation, removal or failure to be reelected at the end
of his or her term. Until a CSU vests, the
75
Director has none of the rights of a shareholder with
respect to the CSU or the common stock underlying the CSU. CSUs are not transferable.
The Company applies variable plan accounting, in accordance with APB No. 25, for grants of
CSUs issued under the Plan and recognizes compensation cost over the vesting period. During the
year ended December 31, 2004, the Board awarded an aggregate of 55.6 thousand CSUs to the
non-employee directors totaling $0.3 million with a weighted average fair value of $5.94 per CSU.
Since the Plan was subject to shareholder approval, the CSUs were not considered to be granted in
accordance with FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation An Interpretation of APB Opinion No. 25 and therefore no compensation cost was
recognized until the shareholders approved the Plan at the 2005 Annual Shareholders Meeting on May
24, 2005, the grant date. At that time, the Company recorded unearned compensation at the then
current market price totaling $0.5 million with a weighted average fair market value of $8.25 per
CSU, to be recognized over the two and three year vesting periods in accordance with APB No. 25.
During the year ended December 31, 2005, the Board awarded an aggregate of 47.8 thousand CSUs
to the non-employee directors totaling $0.4 million with a weighted average fair market value of
$8.27 per CSU. Accordingly, the Company recorded unearned compensation at the then current market
price totaling $0.4 million to be recognized over the two and three year vesting periods in
accordance with APB No. 25. During 2005, the Company recognized compensation cost for CSUs issued
in 2005 and 2004 of $0.4 million and $0.1 million, respectively.
Note 20. Segments and Geographic Information
The Company operates within two regions, the Americas and EMEA which represented 64.3% and
35.7%, respectively, of consolidated revenues for 2005. The Americas and EMEA regions represented
60.7% and 39.3%, respectively, of consolidated revenues for 2004, and 66.9% and 33.1%,
respectively, of consolidated revenues for 2003. Each region represents a reportable segment
comprised of aggregated regional operating segments, which portray similar economic
characteristics. The Company aligns its business into two segments to effectively manage the
business and support the customer care needs of every client and to respond to the demands of the
Companys global customers.
The reportable segments consist of (1) the Americas, which includes the United States, Canada,
Latin America, India and the Asia Pacific Rim, and provides outsourced customer contact management
solutions (with an emphasis on technical support and customer service) and technical staffing and
(2) EMEA, which includes Europe, the Middle East and Africa, and provides outsourced customer
contact management solutions (with an emphasis on technical support and customer service) and
fulfillment services. The sites within Latin America, India and the Asia Pacific Rim are included
in the Americas region given the nature of the business and client profile, which is primarily made
up of U.S. based companies that are using the Companys services in these locations to support
their customer contact management needs.
Information about the Companys reportable segments for the years ended December 31, 2005,
2004 and 2003 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
Americas |
|
|
EMEA |
|
|
Other (1) |
|
|
Total |
|
|
|
|
For the Year Ended December 31, 2005: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
318,173 |
|
|
$ |
176,745 |
|
|
|
|
|
|
$ |
494,918 |
|
Depreciation and amortization |
|
|
20,422 |
|
|
|
5,521 |
|
|
|
|
|
|
|
25,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before
reversal of restructuring and other charges
and impairment of long-lived assets |
|
$ |
50,224 |
|
|
$ |
7,490 |
|
|
$ |
(31,092 |
) |
|
$ |
26,622 |
|
Reversal of restructuring and other charges |
|
|
|
|
|
|
|
|
|
|
314 |
|
|
|
314 |
|
Impairment of long-lived assets |
|
|
|
|
|
|
|
|
|
|
(605 |
) |
|
|
(605 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,331 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
2,772 |
|
|
|
2,772 |
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
(5,695 |
) |
|
|
(5,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
23,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
|
|
Americas |
|
|
EMEA |
|
|
Other (1) |
|
|
Total |
|
|
|
|
For the Year Ended December 31, 2004: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
283,253 |
|
|
$ |
183,460 |
|
|
|
|
|
|
$ |
466,713 |
|
Depreciation and amortization |
|
|
22,042 |
|
|
|
8,195 |
|
|
|
|
|
|
|
30,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before
reversal of restructuring and other charges
and impairment of long-lived assets |
|
$ |
30,960 |
|
|
$ |
10,478 |
|
|
$ |
(28,264 |
) |
|
$ |
13,174 |
|
Reversal of restructuring and other charges |
|
|
|
|
|
|
|
|
|
|
113 |
|
|
|
113 |
|
Impairment of long-lived assets |
|
|
|
|
|
|
|
|
|
|
(690 |
) |
|
|
(690 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,597 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
3,264 |
|
|
|
3,264 |
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
(5,047 |
) |
|
|
(5,047 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,814 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2003: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
321,195 |
|
|
$ |
159,164 |
|
|
|
|
|
|
$ |
480,359 |
|
Depreciation and amortization |
|
|
21,184 |
|
|
|
8,941 |
|
|
|
|
|
|
|
30,125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before reversal
of restructuring and other charges |
|
$ |
31,607 |
|
|
$ |
2,497 |
|
|
$ |
(23,382 |
) |
|
$ |
10,722 |
|
Reversal of restructuring and other charges |
|
|
|
|
|
|
|
|
|
|
646 |
|
|
|
646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,368 |
|
Other income |
|
|
|
|
|
|
|
|
|
|
2,588 |
|
|
|
2,588 |
|
Provision for income taxes |
|
|
|
|
|
|
|
|
|
|
(4,651 |
) |
|
|
(4,651 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
9,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other items (including corporate costs, restructuring and impairment costs, other income
and expense, and income taxes) are shown for purposes of reconciling to the Companys consolidated
totals as shown in the table above for the three years in the period ended December 31, 2005. The
accounting policies of the reportable segments are the same as those described in Note 1, Summary
of Accounting Policies, to the accompanying consolidated financial statements. Inter-segment
revenues are not material to the Americas and EMEA segment results. The Company evaluates the
performance of its geographic segments based on revenue and income (loss) from operations, and does
not include segment assets or other income and expense items for management reporting purposes. |
For the years ended December 31, 2005, 2004 and 2003 total revenues included $31.4
million, or 6.4% of consolidated revenues, $36.6 million, or 7.8% of consolidated revenues, and
$81.2 million, or 16.9% of consolidated revenues, respectively, from Accenture, a leading systems
integrator that represents a major provider of communication services to whom the Company provides
various outsourced customer contact management services. Effective May 1, 2003, the Company
entered into a subcontractor services agreement (the Agreement) with the systems integrator
following the execution of a primary services agreement between the major provider of communication
services and the systems integrator. Under the terms of this three-year Agreement, which contains
penalty provisions for failure to meet minimum service levels and is cancelable with 6 months
written notice, the Company provides the products and services necessary to support and assist the
systems integrator in the
management and performance of its primary services agreement. The Company expects to renew this
Agreement before it expires on April 30, 2006.
In addition, revenues included $27.3 million, or 5.5% of consolidated revenues, $33.8 million,
or 7.3% of consolidated revenues, and $58.5 million, or 12.2% of consolidated revenues, for the
years ended December 31, 2005, 2004 and 2003, respectively, from a leading software and services
provider. This includes $27.3 million, $33.8 million and $58.0 million in revenue from the Americas
for the years ended December 31, 2005, 2004 and 2003, respectively, and $0.5 million in revenue
from EMEA for the year ended December 31, 2003.
77
Information about the Companys operations by geographic location is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
Revenues (1) : |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
78,997 |
|
|
$ |
85,556 |
|
|
$ |
173,984 |
|
Canada |
|
|
82,084 |
|
|
|
69,045 |
|
|
|
66,147 |
|
Costa Rica |
|
|
45,435 |
|
|
|
36,595 |
|
|
|
28,017 |
|
Philippines |
|
|
98,766 |
|
|
|
79,060 |
|
|
|
45,550 |
|
Other |
|
|
12,891 |
|
|
|
12,997 |
|
|
|
7,497 |
|
|
|
|
|
|
|
|
|
|
|
Total Americas |
|
|
318,173 |
|
|
|
283,253 |
|
|
|
321,195 |
|
|
|
|
|
|
|
|
|
|
|
Germany |
|
|
54,298 |
|
|
|
59,941 |
|
|
|
59,706 |
|
United Kingdom |
|
|
50,246 |
|
|
|
52,073 |
|
|
|
40,500 |
|
Sweden |
|
|
20,758 |
|
|
|
24,704 |
|
|
|
23,814 |
|
Spain |
|
|
12,030 |
|
|
|
11,912 |
|
|
|
4,579 |
|
The Netherlands |
|
|
11,511 |
|
|
|
9,406 |
|
|
|
10,683 |
|
Hungary |
|
|
13,269 |
|
|
|
10,722 |
|
|
|
7,469 |
|
Other |
|
|
14,633 |
|
|
|
14,702 |
|
|
|
12,413 |
|
|
|
|
|
|
|
|
|
|
|
Total EMEA |
|
|
176,745 |
|
|
|
183,460 |
|
|
|
159,164 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
494,918 |
|
|
$ |
466,713 |
|
|
$ |
480,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets (2) : |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
28,735 |
|
|
$ |
26,271 |
|
|
$ |
52,870 |
|
Canada |
|
|
9,009 |
|
|
|
8,363 |
|
|
|
8,557 |
|
Costa Rica |
|
|
3,836 |
|
|
|
4,816 |
|
|
|
6,813 |
|
Philippines |
|
|
15,324 |
|
|
|
18,102 |
|
|
|
13,181 |
|
Other |
|
|
3,363 |
|
|
|
5,734 |
|
|
|
4,776 |
|
|
|
|
|
|
|
|
|
|
|
Total Americas |
|
|
60,267 |
|
|
|
63,286 |
|
|
|
86,197 |
|
|
|
|
|
|
|
|
|
|
|
Germany |
|
|
3,494 |
|
|
|
5,043 |
|
|
|
6,119 |
|
United Kingdom |
|
|
5,527 |
|
|
|
7,137 |
|
|
|
7,767 |
|
Sweden |
|
|
376 |
|
|
|
639 |
|
|
|
1,112 |
|
Spain |
|
|
971 |
|
|
|
1,775 |
|
|
|
1,471 |
|
The Netherlands |
|
|
215 |
|
|
|
353 |
|
|
|
602 |
|
Hungary |
|
|
2,071 |
|
|
|
2,741 |
|
|
|
2,310 |
|
Other |
|
|
1,452 |
|
|
|
1,917 |
|
|
|
1,616 |
|
|
|
|
|
|
|
|
|
|
|
Total EMEA |
|
|
14,106 |
|
|
|
19,605 |
|
|
|
20,997 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
74,373 |
|
|
$ |
82,891 |
|
|
$ |
107,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Revenues are attributed to countries based on location of customer, except for revenues for
Costa Rica, Philippines, China and India which is primarily comprised of customers located in the
U.S., but serviced by centers in those respective geographic locations. |
|
(2) |
|
Long-lived assets include property and equipment, net and intangibles, net. |
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill : |
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
5,918 |
|
|
$ |
5,224 |
|
|
$ |
5,085 |
|
EMEA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,918 |
|
|
$ |
5,224 |
|
|
$ |
5,085 |
|
|
|
|
|
|
|
|
|
|
|
Revenues for the Companys products and services are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
|
|
2005 |
|
|
2004 |
|
|
2003 |
|
|
|
|
Technical support and customer service and fulfillment |
|
$ |
486,237 |
|
|
$ |
455,468 |
|
|
$ |
465,678 |
|
Technical staffing and consultative professional services |
|
|
8,681 |
|
|
|
11,245 |
|
|
|
14,681 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
494,918 |
|
|
$ |
466,713 |
|
|
$ |
480,359 |
|
|
|
|
|
|
|
|
|
|
|
78
Note 21. Related Party Transactions
The Company paid John H. Sykes, the founder and former Chairman of the Company, $0.6 million
for the use of his private jet in each of the years 2005, 2004 and 2003 which is based on two times
fuel costs and other actual costs incurred for each trip.
A former member of the Board of Directors of the Company received broker commissions from the
Companys 401(k) investment firm of $0.05 million for the year ended December 31, 2002 and
insurance commissions for the placement of the Companys various corporate insurance programs of
approximately $0.1 million for the year ended December 31, 2002. This arrangement was terminated in
2002. During 2003, the Company determined that the payment of broker commissions was a prohibited
transaction under Federal regulations. As a result, during 2003, the Company reimbursed the 401(k)
plan $0.2 million for previously paid broker commissions and paid a penalty to the U.S. government
of $0.1 million.
Note 22. Retirement of Founder and Chairman
On August 2, 2004, John H. Sykes publicly announced his resignation and retirement as Chairman
and Chief Executive Officer of the Company. Mr. Sykes was employed by the Company pursuant to the
Amended and Restated Executive Employment Agreement (the Employment Agreement) dated as of
October 1, 2001. The Employment Agreement had an initial term of five years, expiring on October 1,
2006, and included automatic one-year extensions unless there was appropriate notice of
termination.
As a result of Mr. Sykes resignation prior to the end of the initial term of the Employment
Agreement, the Company and Mr. Sykes terminated the Employment Agreement and entered into a
retirement and consulting agreement (the Retirement and Consulting Agreement) dated December 10,
2004. Under the terms of the Retirement and Consulting Agreement, Mr. Sykes employment with the
Company was terminated effective as of December 31, 2004, and the Company paid all compensation and
benefits due under the Employment Agreement through December 31, 2004. In addition, the Company
paid Mr. Sykes $1.7 million in base severance pay and unused vacation benefits, including a lump
sum of $0.3 million related to the relinquishment of any rights to an office and a secretary and
the right to continue to be covered as an employee under the Companys group health insurance
policy. The $1.7 million payment to Mr. Sykes is included in General and administrative costs in
the accompanying Consolidated Statement of Operations for the year ended December 31, 2004.
Additionally, the Company agreed to pay Hyde Park Equity, LLC, a limited liability company
owned by Mr. Sykes, fees of $150,000, which will be paid in seven equal quarterly installments of
$21,428, for consulting services to be provided by Mr. Sykes through Hyde Park Equity during the
period from December 31, 2004, through October 1, 2006. In the event of Mr. Sykes death prior to
October 1, 2006, the Company shall pay only a pro rata amount for the quarter in which the services
are no longer provided, and nothing further shall be owed for consulting services. For such
amount, Hyde Park Equity will cause Mr. Sykes to provide up to 37.5 days of consulting services per
year at the request of the Board of Directors or its Chairman. Such services include advice
dealing with significant business issues and an orderly management transition. Additional days of
service are billed at the rate of $2,000 per day. The Company also agreed to reimburse Hyde Park
Equity for out of pocket business expenses incurred in connection with providing services to the
Company. During 2005, the Company paid $0.1 million to Hyde Park Equity under this agreement.
79
Schedule II Valuation and Qualifying Accounts
Years ended December 31, 2005, 2004 and 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
|
|
|
|
(Reversals) |
|
|
|
|
|
|
|
|
|
|
|
|
Charged to |
|
|
|
|
|
|
|
|
Balance at |
|
(Credited) to |
|
|
|
|
|
Balance at |
|
|
Beginning |
|
Costs and |
|
|
|
|
|
End of |
|
|
of Period |
|
Expenses |
|
Deductions |
|
Period |
|
|
|
Allowance for doubtful accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
|
$ |
4,293 |
|
|
$ |
(649 |
) |
|
$ |
593 |
(1) |
|
$ |
3,051 |
|
Year ended December 31, 2004 |
|
|
4,242 |
|
|
|
267 |
|
|
|
216 |
(1) |
|
|
4,293 |
|
Year ended December 31, 2003 |
|
|
5,102 |
|
|
|
441 |
|
|
|
1,301 |
(1) |
|
|
4,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for net deferred tax assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005 |
|
$ |
30,391 |
|
|
$ |
|
|
|
$ |
1,584 |
|
|
$ |
28,807 |
|
Year ended December 31, 2004 |
|
|
30,582 |
|
|
|
|
|
|
|
191 |
|
|
|
30,391 |
|
Year ended December 31, 2003 |
|
|
19,914 |
|
|
|
10,668 |
|
|
|
|
|
|
|
30,582 |
|
|
|
|
(1) |
|
Net write-offs and recoveries. |
80